SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 0-15341

                               DONEGAL GROUP INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                               23-2424711
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                               Identification No.)

1195 River Road, Marietta, Pennsylvania                                  17547
(Address of principal executive offices)                              (Zip code)

Registrant's telephone number, including area code: (717) 426-1931

Securities registered pursuant to Section 12(b) of the Act: None.

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $1.00 par value
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.  Yes __X__  No _____.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

On March 15, 2001, the aggregate market value (based on the closing sales price
on that date) of the voting stock held by non-affiliates of the Registrant was
$33,698,644.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 8,902,015 shares of Common
Stock outstanding on March 15, 2001.

                      DOCUMENTS INCORPORATED BY REFERENCE:

i.   Portions of the Registrant's annual report to stockholders for the fiscal
     year ended December 31, 2000 are incorporated by reference into Parts I, II
     and IV of this report.

ii.  Portions of the Registrant's proxy statement relating to the annual meeting
     of stockholders to be held April 19, 2001 are incorporated by reference
     into Part III of this report.

                               DONEGAL GROUP INC.

                            INDEX TO FORM 10-K REPORT

                                                                                             Page

PART I.........................................................................................1

  Item 1.   Business...........................................................................1
  Item 2.   Properties........................................................................23
  Item 3.   Legal Proceedings.................................................................24
  Item 4.   Submission of Matters to a Vote of Security Holders...............................24
            Executive Officers of the Company.................................................24

PART II.......................................................................................25

  Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters.........25
  Item 6.   Selected Financial Data...........................................................25
  Item 7.   Management's Discussion and Analysis of Financial Condition and
            Results of Operations.............................................................25
  Item 8.   Financial Statements and Supplementary Data.......................................25
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..........................................................25

PART III......................................................................................26

  Item 10.  Directors and Executive Officers of the Registrant................................26
  Item 11.  Executive Compensation............................................................26
  Item 12.  Security Ownership of Certain Beneficial Owners and Management....................26
  Item 13.  Certain Relationships and Related Transactions....................................26

PART IV.......................................................................................27

  Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K...................27

                                      -i-

                                     PART I

Item 1.  Business.

     (a)  General Development of Business.

     Donegal Group Inc. is an insurance holding company formed in August 1986,
which is headquartered in Pennsylvania and engages, through its subsidiaries, in
the property and casualty insurance business in 15 mid-Atlantic and southeastern
states. As used herein, "DGI" or the "Company" refers to Donegal Group Inc. and
its insurance subsidiaries, Atlantic States Insurance Company ("Atlantic
States"), Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic
Insurance Company ("Delaware Atlantic"), Pioneer Insurance Company ("Pioneer
Ohio"), Southern Heritage Insurance Company ("Southern Heritage") and Pioneer
Insurance Company ("Pioneer New York"). DGI is currently 62.2% owned by Donegal
Mutual Insurance Company (the "Mutual Company"). DGI and its subsidiaries and
the Mutual Company underwrite a broad line of personal and commercial coverages,
consisting of private passenger and commercial automobile, homeowners,
commercial multi-peril, workers' compensation and other lines of insurance.

     The Company's strategy is to seek growth both internally and through
acquisitions. Since the formation of the Company and Atlantic States in 1986,
the Company has completed the following acquisitions:

                                                                              Net Premiums
                                                             Net Premiums     Written Year
                                                             Written Year         Ended
                                                  Year         Prior to       December 31,
Company Acquired                                Acquired     Acquisition          2000
- ----------------                                --------     -----------      ------------
                                                                      
Southern Insurance Company of Virginia            1988       $ 1,128,843       $14,814,884
Delaware Atlantic Insurance Company               1995         2,824,398         6,179,670
Pioneer Insurance Company (Ohio)                  1997         4,499,273         4,697,082
Southern Heritage Insurance Company               1998        32,002,540        15,879,768
Pioneer Insurance Company (New York)              2001         1,917,723         1,917,723

     The Company evaluates other acquisition candidates on a continuing basis.
However, there can be no assurance as to whether or when the Company will effect
any additional acquisitions.

     Atlantic States, which DGI organized in September 1986, participates in an
underwriting pool whereby it cedes to the Mutual Company the premiums, losses
and loss expenses from all of its insurance business and assumes from the Mutual
Company a specified portion of the pooled business, which also includes
substantially all of the Mutual

                                      -1-

Company's property and casualty insurance business. Effective as of October 1,
1986, DGI entered into a pooling agreement with the Mutual Company whereby
Atlantic States assumed 35% of the pooled business written or in force on or
after October 1, 1986, with the Mutual Company remaining solely responsible for
any losses in the pooled business with dates of loss on or before the close of
business on September 30, 1986. Pursuant to amendments to the pooling agreement
subsequent to October 1, 1986, the Mutual Company has increased the percentage
of retrocessions of the pooled business to Atlantic States, and, since July 1,
2000, 70% of the pooled business has been retroceded to Atlantic States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 hereof and Note 3 to the Consolidated Financial
Statements incorporated by reference herein.

     On December 29, 1988, DGI acquired all of the outstanding capital stock of
Southern in exchange for a $3,000,000 equity contribution to Southern. Since
January 1, 1991, Southern has ceded to the Mutual Company 50% of its direct
premiums written and 50% has been retained by Southern. Because the Mutual
Company places substantially all of the business assumed from Southern in the
pool, in which DGI has a 70% allocation, DGI's results of operations include
approximately 85% of the business written by Southern. See Note 3 to the
Consolidated Financial Statements incorporated by reference herein.

     As of December 31, 1995, the Company acquired all of the outstanding
capital stock of Delaware Atlantic pursuant to a Stock Purchase Agreement dated
as of December 21, 1995 between the Company and the Mutual Company.

     As of March 31, 1997, the Company acquired all of the outstanding capital
stock of Pioneer Ohio pursuant to a Stock Purchase Agreement dated as of April
7, 1997 between the Company and the Mutual Company.

     On November 17, 1998, DGI purchased all of the outstanding capital stock of
Southern Heritage, a Georgia-domiciled property and casualty insurance company,
from Southern Heritage Limited Partnership for a purchase price, as finally
settled, of $18,824,950 in cash.

     As of January 1, 2001, DGI purchased all of the outstanding capital stock
of Pioneer New York from the Mutual Company pursuant to a Stock Purchase
Agreement dated as of July 20, 2000.

     The Mutual Company is currently a party to retrocessional reinsurance
contracts with each of the Company's subsidiaries, Southern, Delaware Atlantic,
Pioneer Ohio, Southern Heritage and Pioneer New York, whereby the Mutual Company
reinsures each such subsidiary in respect of 100% of the net liability that may
accrue to such subsidiary from its insurance operations and retrocedes 100% of
the net liability back to such subsidiary, with the exception of Pioneer New
York, as to which it retrocedes, effective January 1, 2000, 90% of the net
liability, and each such subsidiary assumes the retroceded liability.

                                      -2-

     DGI and the Mutual Company jointly own Donegal Financial Services
Corporation ("Donegal Financial"), the holding company for Province Bank FSB
("Province Bank"), a federal savings bank headquartered in Marietta,
Pennsylvania, the deposits of which are insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. In connection with
the initial capitalization of Province Bank, which opened for business in
September 2000, the Mutual Company purchased 55%, for $3,575,000, and the
Company purchased 45%, for $2,925,000, of the capital stock of Donegal
Financial. The Company provided additional cash, in the amount of $117,000, to
Donegal Financial subsequent to September 2000.

     Unless otherwise stated, all information in this report gives retroactive
effect to the four-for-three split of the Company's Common Stock effected
through a stock dividend of one share of Common Stock for each three shares
outstanding, which was paid on June 25, 1998 to stockholders of record on June
10, 1998.

     (b)  Financial Information about Industry Segments.

     The Company has three segments, which consist of the investment function,
the personal lines of insurance and the commercial lines of insurance. Financial
information about these segments is set forth in Note 17 to the Consolidated
Financial Statements incorporated by reference herein.

     (c)  Narrative Description of Business.

Relationship with the Mutual Company

     DGI's insurance operations are interrelated with the insurance operations
of the Mutual Company and, because of the percentage of the pooled business
assumed by DGI, DGI's results of operations are dependent to a material extent
upon the success of the Mutual Company. In addition, various reinsurance
agreements exist between the Company's insurance subsidiaries and the Mutual
Company. The Mutual Company is responsible for underwriting and marketing the
pooled business and provides facilities, employees and services required to
conduct the business of DGI on a cost-allocated basis. The Mutual Company owned
62.2% of DGI as of March 15, 2001.

     Through the pool and through its insurance subsidiaries, DGI writes
personal and commercial property and casualty insurance lines, including
automobile, homeowners, commercial multi-peril, workers' compensation and other
lines of business.

     The Mutual Company provides all personnel for the Company and certain of
its insurance subsidiaries, including Atlantic States, Delaware Atlantic,
Southern and Pioneer Ohio. Expenses are allocated to the Company, Delaware
Atlantic, Southern and Pioneer Ohio according to a time allocation and estimated
usage agreement, and to Atlantic States in

                                      -3-

relation to the relative participation of the Mutual Company and Atlantic States
in the pooling agreement described herein. Expenses allocated to the Company
under such agreement were $26,677,399 in 2000.

     The Mutual Company leases office equipment and automobiles from the
Company, under a lease dated January 1, 2000. The Mutual Company made lease
payments to the Company of $836,997 in 2000.

     Under the terms of the intercompany pooling agreement, Atlantic States
cedes to the Mutual Company the premiums, losses and loss expenses on all of its
insurance business. Substantially all of the Mutual Company's property and
casualty insurance business written or in force on or after October 1, 1986 is
included in the pooled business, with the Mutual Company remaining solely
responsible for any losses in the pooled business with dates of loss on or
before the close of business on September 30, 1986. Pursuant to amendments to
the pooling agreement subsequent to October 1, 1986, the Mutual Company has
increased the percentage of retrocessions of the pooled business to Atlantic
States, and, as most recently amended, effective as of July 1, 2000, 70% of the
pooled business has been retroceded to Atlantic States. All premiums, losses,
loss expenses and other underwriting expenses are prorated among the parties on
the basis of their participation in the pool. The pooling agreement may be
amended or terminated at the end of any calendar year by agreement of the
parties. The allocations of pool participation percentages between the Mutual
Company and Atlantic States are based on the pool participants' relative amounts
of capital and surplus, expectations of future relative amounts of capital and
surplus and the ability of the Company to raise capital for Atlantic States. The
Company does not currently anticipate a further increase in Atlantic States'
percentage of participation in the pool, nor does the Company intend to
terminate the participation of Atlantic States in the pooling agreement.

     The underwriting pool is intended to produce a more uniform and stable
underwriting result from year to year for the participants in the pool than they
would experience individually and to spread the risk of loss among all the
participants. Each company participating in the pool has at its disposal the
capacity of the entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional capacity
exists because such policy exposures are spread among the pool participants,
each of which has its own capital and surplus.

     In addition to the underwriting pool, through the retrocessional
reinsurance agreements with each of the Company's subsidiaries, Southern,
Delaware Atlantic, Pioneer Ohio, Southern Heritage and Pioneer New York, the
Mutual Company reinsures each such subsidiary in respect of 100% of the net
liability that may accrue to such subsidiary from its insurance operations and
retrocedes 100% of the net liability back to such subsidiary, with the exception
of Pioneer New York, as to which it retrocedes, effective January 1, 2000, 90%
of the net liability, and each such subsidiary assumes the retroceded liability.

                                      -4-

     DGI and the Mutual Company jointly own Donegal Financial, the holding
company for Province Bank, a federal savings bank headquartered in Pennsylvania,
the deposits of which are insured by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation. In connection with the initial
capitalization of Province Bank, which opened for business in September 2000,
the Mutual Company purchased 55%, for $3,575,000, and the Company purchased 45%,
for $2,925,000, of the capital stock of Donegal Financial. The Company provided
additional cash, in the amount of $117,000, to Donegal Financial subsequent to
September 2000.

     The Mutual Company and Province Bank are parties to a lease dated September
1, 2000 whereby Province Bank leases from the Mutual Company 3,600 square feet
of a building located in Marietta, Pennsylvania for an annual rent based on an
independent appraisal. The Mutual Company and Province Bank are also parties to
an Administrative Services Agreement dated September 1, 2000 whereby the Mutual
Company is obligated to provide various human resource services, principally
payroll and employee benefits administration, administrative support, facility
and equipment maintenance services and purchasing, to Province Bank, subject to
the overall limitation that the costs to be charged by the Mutual Company may
not exceed the costs of independent vendors for similar services and further
subject to annual maximum cost limitations specified in the Administrative
Services Agreement.

     All of the Company's officers are officers of the Mutual Company, five of
the Company's seven directors are directors of the Mutual Company and three of
the Company's executive officers are directors of the Mutual Company. The
Company and the Mutual Company maintain a Coordinating Committee, which consists
of two outside directors from each of the Company and the Mutual Company, none
of whom holds seats on both Boards, to review and evaluate the pooling agreement
between the Company and the Mutual Company and to be responsible for matters
involving actual or potential conflicts of interest between the Company and the
Mutual Company. The decisions of the Coordinating Committee are binding on the
Company and the Mutual Company. The Company's Coordinating Committee members
must conclude that intercompany transactions are fair and equitable to the
Company. The purpose of this provision is to protect the interests of the
stockholders of the Company other than the Mutual Company. The Coordinating
Committee meets on an as-needed basis.

DGI's Business Strategy

     DGI, in conjunction with the Mutual Company, has multiple strategies which
the management of DGI believes have resulted in underwriting results that are
favorable when compared to those of the property and casualty insurance industry
in general over the past five years. The principal strategies comprise the
following:

     o    A regional company concept designed to provide the advantages of local
          marketing, underwriting and claims servicing with the economies of

                                      -5-

          scale from centralized accounting, administrative, investment, data
          processing and other services.

     o    An underwriting program and product mix designed to produce a
          Company-wide underwriting profit, i.e., a combined ratio of less than
          100%, from careful risk selection and adequate pricing.

     o    A goal of a closely balanced ratio between commercial business and
          personal business.

     o    An agent selection process that focuses on appointing agencies with
          proven market strategies for the development of profitable business
          and an agent compensation plan providing for additional commissions
          based upon premium volume and profitability and the right to
          participate in the Company's Agency Stock Purchase Plan.

     o    A continuing effort to attract and retain qualified employees who
          receive incentive compensation based upon historical results.

     o    A goal of expanding operations in current and adjacent states.

Property and Casualty Insurance Products and Services

     The following table indicates the percentage of DGI's net premiums written
represented by commercial lines and by personal lines for the years ended
December 31, 2000, 1999 and 1998:

                                                     Year Ended December 31,
                                                    --------------------------
                                                    2000       1999       1999
                                                    ----       ----       ----
Net Premiums Written:
  Commercial..................................      37.6%      35.6%      38.2%
  Personal....................................      62.4%      64.4%      61.8%

     The commercial lines consist primarily of automobile, multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. These types of insurance are described in
greater detail below:

     Commercial

     o    Commercial automobile -- policies that provide protection against
          liability for bodily injury and property damage arising from
          automobile accidents, and provide protection against loss from damage
          to automobiles owned by the insured.

                                      -6-

     o    Workers' compensation -- policies purchased by employers to provide
          benefits to employees for injuries sustained during employment. The
          extent of coverage is established by the workers' compensation laws of
          each state.

     o    Commercial multi-peril -- policies that provide protection to
          businesses against many perils, usually combining liability and
          physical damage coverages.

     Personal

     o    Private passenger automobile -- policies that provide protection
          against liability for bodily injury and property damage arising from
          automobile accidents, and provide protection against loss from damage
          to automobiles owned by the insured.

     o    Homeowners -- policies that provide coverage for damage to residences
          and their contents from a broad range of perils, including, fire,
          lightning, windstorm and theft. These policies also cover liability of
          the insured arising from injury to other persons or their property
          while on the insured's property and under other specified conditions.

     The following table sets forth the combined ratios of DGI, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, federal income taxes or other non-operating income or
expense. DGI's operating income depends on income from both underwriting
operations and investments. DGI's combined ratio for 1999 was adversely impacted
by restructuring charges of approximately $2.2 million.

                                                     Year Ended December 31,
                                                 -------------------------------
                                                  2000        1999        1998
                                                 ------      ------      ------
GAAP combined ratio ........................      101.5%      106.5%       99.8%
                                                 ------      ------      ------
Statutory operating ratios:
  Loss ratio ...............................       69.1        68.8        64.0
  Expense ratio ............................       30.5        37.1        35.4
  Dividend ratio ...........................        0.9         0.9         1.4
                                                 ------      ------      ------
Statutory combined ratio ...................      100.5%      106.8%      100.8%
                                                 ======      ======      ======
Industry statutory combined ratio(1) .......      110.5%      107.5%      105.6%
                                                 ======      ======      ======

- ----------
(1)  Source: A.M. Best Co.

                                      -7-

     DGI is required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines, in
states in which DGI operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements (FAIR)
plans, reinsurance facilities and windstorm plans. Legislation establishing
these programs requires all companies that write lines covered by these programs
to provide coverage (either directly or through reinsurance) for insureds who
cannot obtain insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable to such
insureds to each company on the basis of direct premiums written or the number
of automobiles insured. Generally, state law requires participation in such
programs as a condition to doing business. The loss ratio on insurance written
under involuntary programs has traditionally been greater than the loss ratio on
insurance in the voluntary market. During 1998, 1999 and 2000, the Company
received assessments totaling $1.3 million, $726,000 and $813,000, respectively,
from the Pennsylvania Insurance Guaranty Association relating to the insolvency
of two medical malpractice insurers.

     The following table sets forth the net premiums written and combined ratios
by line of insurance for the business of DGI, prepared in accordance with
statutory accounting practices prescribed or permitted by state insurance
authorities, for the periods indicated.

                                                Year Ended December 31,
                                         --------------------------------------
                                            2000          1999          1998
                                         ----------    ----------    ----------
                                                 (dollars in thousands)
Net Premiums Written:
Commercial:
  Automobile .........................   $   15,112    $   12,608    $   11,120
  Workers' compensation ..............       21,174        17,519        15,446
  Commercial multi-peril .............       21,668        18,872        17,046
  Other ..............................        1,597         1,433         1,473
                                         ----------    ----------    ----------
    Total commercial .................       59,551        50,432        45,085
                                         ----------    ----------    ----------

Personal:
  Automobile .........................       64,288        60,716        46,609
  Homeowners .........................       28,823        25,573        21,737
  Other ..............................        5,542         5,135         4,724
                                         ----------    ----------    ----------
    Total personal ...................       98,653        91,424        73,070
                                         ----------    ----------    ----------
Total business .......................   $  158,204    $  141,856    $  118,155
                                         ==========    ==========    ==========

                                      -8-

                                                    Year Ended December 31,
                                             ----------------------------------
                                              2000          1999          1998
                                             ------        ------        ------
                                                 (dollars in thousands)
Statutory Combined Ratios:
Commercial:
  Automobile .........................         99.9%        113.8%        118.2%
  Workers' compensation ..............         91.9          96.7          80.4
  Commercial multi-peril .............        102.3          95.7          85.6
  Other ..............................         39.0          80.6          71.1
                                             ------        ------        ------
    Total commercial .................         96.2         100.0          91.3
                                             ------        ------        ------

Personal:
  Automobile .........................         99.5         106.8         104.2
  Homeowners .........................        110.9         123.9         115.7
  Other ..............................        104.1          87.1          91.2
                                             ------        ------        ------
    Total personal ...................        103.1         110.6         106.7
                                             ------        ------        ------

Total business .......................        100.5%        106.8%        100.8%
                                             ======        ======        ======

Property and Casualty Underwriting

     The underwriting department is responsible for the establishment of
underwriting and risk selection guidelines and criteria for the various
insurance products written by DGI. The underwriting department, in conjunction
with the marketing representatives, works closely with DGI's independent
insurance agents to insure a comprehensive knowledge on the part of the agents
of DGI's underwriting requirements and risk selection process.

     DGI's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. DGI
and the Mutual Company have a conservative underwriting philosophy, which, in
the opinion of management, is one of the prime reasons for DGI's favorable loss
ratios relative to the property and casualty insurance industry over the last
five years, with the exception of 1999, when DGI's loss ratio was adversely
impacted by restructuring charges.

     The underwriting department has over time initiated risk inspection
procedures and underwriting analyses on a per risk and class of business basis.
It has also automated underwriting processing utilizing technology such as bar
coding. Management has established monitoring and auditing processes to verify
compliance with underwriting requirements and procedures.

     The underwriting department and the research and development department are
responsible for the development of new insurance products and enhancements of
existing

                                      -9-

products. Underwriting profitability is enhanced by the creation of niche
products focused on classes of business which traditionally have provided
underwriting profits.

Marketing

     DGI's insurance products, together with the products of the Mutual Company
and their respective subsidiaries, are marketed through approximately 3,300
independent insurance agents associated with approximately 1,200 insurance
agencies. Business is written by either DGI or the Mutual Company depending upon
geographic location, agency license and product. Management has developed an
agency appointment procedure that focuses on appointing agencies with proven
marketing strategies for the development of profitable business. DGI regularly
evaluates its agency force and continues to strive to obtain and retain a
significant position within each agency relative to the amount of business
similar to that of DGI placed by the agency with other insurers. DGI and the
Mutual Company have developed a successful contingent commission plan for agents
under which additional commissions are payable based upon the volume of premiums
produced and the profitability of the business of the agency written by DGI and
the Mutual Company. Management believes the contingent commission program and
the Company's Agency Stock Purchase Plan have enhanced the ability of DGI and
the Mutual Company to write profitable business.

     DGI has granted certain agents the authority to bind insurance within
underwriting and pricing limits specified by DGI without the prior approval of
DGI. However, DGI generally reviews all coverages placed by its agents and,
subject to applicable insurance regulations, may cancel the coverage if it is
inconsistent with DGI's guidelines.

     DGI believes that its regional structure enables it to compete effectively
with large national companies. This regional structure permits DGI to take
advantage of its knowledge of local operating territories and the opportunity to
form strong, long-term relationships with the agents that represent DGI and the
Mutual Company.

     DGI and the Mutual Company have developed comprehensive growth strategies
for each of the commercial and personal lines of insurance business. DGI has
focused on the small-to medium-sized commercial insurance markets, which have
traditionally been a more stable and profitable segment of the property and
casualty insurance business than the large commercial insurance markets, which
have become increasingly competitive in the past several years. Commercial lines
marketing is characterized by account selling, in which multiple lines of
insurance are offered to a single policyholder.

     DGI believes that competitive and comprehensive products targeted to
selected classes of personal lines business, along with excellent service to
agents and policyholders, provides a foundation for growth and profitability. As
is customary in the industry, insureds are encouraged to place both their
homeowners and personal automobile insurance with DGI or the Mutual Company and
are offered a discount for doing so.

                                      -10-

Claims

     The claims department develops and implements policies and procedures for
the establishment of claim reserves and the timely resolution and payment of
claims. The management and staff of the claims department resolve policy
coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters.

     Insurance claims are normally investigated and adjusted by internal claims
adjusters and supervisory personnel. Independent adjusters are employed as
needed to handle claims in territories in which the volume of claims is not
sufficient to justify hiring internal claims adjusters. The litigation and
personal injury sections manage all claims litigation, and all claims above
$25,000 require home office review and settlement authorization.

     Field office staffs are supported by home office technical, litigation,
material damage, subrogation and medical audit personnel who provide specialized
claims support. An investigative unit attempts to prevent fraud and abuse and to
control losses.

Liabilities for Losses and Loss Expenses

     Liabilities for losses and loss expenses are estimates at a given point in
time of what the insurer expects to pay to claimants, based on facts and
circumstances then known, and it can be expected that the ultimate liability
will exceed or be less than such estimates. Liabilities are based on estimates
of future trends and claims severity, judicial theories of liability and other
factors. However, during the loss adjustment period, additional facts regarding
individual claims may become known, and consequently it often becomes necessary
to refine and adjust the estimates of liability. Any adjustments are reflected
in operating results in the year in which the changes are made.

     DGI maintains liabilities for the eventual payment of losses and loss
expenses with respect to both reported and unreported claims. Liabilities for
loss expenses are intended to cover the ultimate costs of settling all losses,
including investigation and litigation costs from such losses. The amount of
liability for reported losses is primarily based upon a case-by-case evaluation
of the type of risk involved and knowledge of the circumstances surrounding each
claim and the insurance policy provisions relating to the type of loss. The
amount of liability for unreported claims and loss expenses is determined on the
basis of historical information by line of insurance. Inflation is implicitly
provided for in the reserving function through analysis of costs, trends and
reviews of historical reserving results. Liabilities are closely monitored and
are recomputed periodically by the Company and the Mutual Company using new
information on reported claims and a variety of statistical techniques.
Liabilities for losses are not discounted.

                                      -11-

     The establishment of appropriate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed DGI's loss and loss expense reserves and have an adverse effect on DGI's
results of operations and financial condition. As is the case for virtually all
property and casualty insurance companies, DGI has found it necessary in the
past to revise estimated future liabilities for losses and loss expenses and
further adjustments could be required in the future. However, on the basis of
DGI's internal procedures, which analyze, among other things, DGI's experience
with similar cases and historical trends such as reserving patterns, loss
payments, pending levels of unpaid claims and product mix, as well as court
decisions, economic conditions and public attitudes, management of DGI believes
that adequate provision has been made for DGI's liability for losses and loss
expenses.

     Differences between liabilities reported in DGI's financial statements
prepared on the basis of generally accepted accounting principles ("GAAP") and
financial statements prepared on a statutory accounting basis result from
reducing statutory liabilities for anticipated salvage and subrogation
recoveries. These differences amounted to $8,042,860, $7,736,942 and $7,963,559
at December 31, 2000, 1999 and 1998, respectively.

     The following tables set forth a reconciliation of the beginning and ending
net liability for unpaid losses and loss expenses for the periods indicated on a
GAAP basis for the Company.

                                                        Year Ended December 31,
                                                    -------------------------------
                                                      2000       1999        1998
                                                    --------   --------    --------
                                                             (in thousands)
                                                                  
Net liability for unpaid losses and loss expenses
  at beginning of year ..........................   $ 97,494   $ 93,863    $ 77,474
Net liabilities of acquired company .............         --         --      14,967
                                                    --------   --------    --------
Net beginning balance as adjusted ...............     97,494     93,863      92,441
Provision for net losses and loss expenses for
  claims incurred in the current year ...........    102,222     99,659      75,463
Decrease in provision for estimated net losses
  and loss expenses for claims incurred in
  prior years ...................................        920       (454)     (2,296)
                                                    --------   --------    --------

Total incurred ..................................    103,142     99,205      73,167
Net losses and loss payments for claims
  incurred during:
The current year ................................     60,865     58,906      44,389
Prior years .....................................     38,477     36,668      27,356
                                                    --------   --------    --------

Total paid ......................................     99,342     95,574      71,745

Net liability for unpaid losses and loss expenses
  at end of year ................................   $101,294   $ 97,494    $ 93,863
                                                    ========   ========    ========

                                      -12-

     The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1990 to 2000, with
supplemental loss data for 2000 and 1999.

     "Net liability at end of year for unpaid losses and loss expenses" sets
forth the estimated liability for net unpaid losses and loss expenses recorded
at the balance sheet date for each of the indicated years. This liability
represents the estimated amount of net losses and loss expenses for claims
arising in the current and all prior years that are unpaid at the balance sheet
date including losses incurred but not reported.

     The "Liability reestimated as of" portion of the table shows the
reestimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payments are
made and more information becomes known about the severity of the remaining
unpaid claims. For example, the 1991 liability has developed an excess after
nine years, in that reestimated net losses and loss expenses are expected to be
$4.7 million less than the estimated liability initially established in 1991 of
$36.2 million.

     The "Cumulative excess" shows the cumulative excess at December 31, 2000 of
the liability estimate shown on the top line of the corresponding column. An
excess in liability means that the liability established in prior years exceeded
actual net losses and loss expenses or were reevaluated at less than the
original amount. A deficiency in liability would mean that the liability
established in prior years was less than actual net losses and loss expenses or
were reevaluated at more than the original amount.

     The "Cumulative amount of liability paid through" portion of the table
shows the cumulative net losses and loss expense payments made in succeeding
years for net losses incurred prior to the balance sheet date. For example, the
1991 column indicates that as of December 31, 2000 payments equal to $31.6
million of the currently reestimated ultimate liability for net losses and loss
expenses of $31.5 million had been made.

                                      -13-

                                                                  Year Ended December 31
                      --------------------------------------------------------------------------------------------------------------
                        1990      1991      1992       1993       1994       1995      1996     1997      1998      1999      2000
                      -------   -------   -------   --------   --------   --------   -------   -------   -------   -------  --------
                                                                      (in thousands)
                                                                                           
Net liability at end
 of year for unpaid
 losses and loss
 expenses ........... $31,898   $36,194   $44,339   $ 52,790   $ 63,317   $ 71,155   $75,428   $77,474   $93,863   $97,494  $101,294

Net liability
 reestimated as of:
  One year later ....  32,923    37,514    45,408     50,583     60,227     68,348    74,044    75,178    93,409    98,397
  Two years later ...  33,550    37,765    42,752     48,132     56,656     66,520    70,545    74,269    93,195
  Three years later .  32,803    35,446    40,693     44,956     54,571     63,187    68,788    72,492
  Four years later ..  31,004    33,931    38,375     42,157     51,825     60,457    66,351
  Five years later ..  30,041    32,907    37,096     41,050     50,493     59,109
  Six years later ...  29,595    32,234    36,682     40,572     49,593
  Seven years later .  29,417    31,976    36,730     39,991
  Eight years later .  29,175    31,685    36,437
  Nine years later ..  29,058    31,543
  Ten years later ...  29,000
Cumulative (excess)
 deficiency ......... $(2,898)  $(4,651)  $(7,902)  $(12,799)  $(13,724)  $(12,046)  $(9,077)  $(4,982)  $  (668)  $   903
                      =======   =======   =======   ========   ========   ========   =======   =======   =======   =======

Cumulative amount
 of liability paid
 through:
  One year later .... $13,003   $13,519   $16,579   $ 16,126   $ 19,401   $ 23,479   $26,477   $27,356   $36,668   $38,477
  Two years later ...  19,795    20,942    24,546     25,393     30,354     37,078    40,384    46,143    56,387
  Three years later .  24,178    25,308    29,385     32,079     38,684     45,796    52,071    57,719
  Four years later ..  26,413    27,826    32,925     36,726     43,655     51,771    58,205
  Five years later ..  27,439    29,605    34,757     39,122     46,331     55,137
  Six years later ...  28,157    30,719    35,739     40,440     47,802
  Seven years later .  28,627    31,173    36,518     40,903
  Eight years later .  28,841    31,412    36,809
  Nine years later ..  28,948    31,585
  Ten years later ...  29,046

                                                                          Year Ended December 31
                                             -------------------------------------------------------------------------------------
                                               1993     1994       1995       1996        1997        1998       1999       2000
                                             -------   -------    -------   --------    --------    --------   --------   --------
                                                                               (in thousands)
                                                                                                  
Gross liability at end of year.........      $70,093   $88,484    $98,894   $114,622    $118,112    $141,409   $149,979   $163,899
Reinsurance recoverable................       17,303    25,167     27,739     39,194      40,638      47,546     52,485     62,605
Net liability at end of year...........       52,790    63,317     71,155     75,428      77,474      93,863     97,494    101,294
Gross reestimated liability - latest...       55,642    72,804     83,726    105,075     113,230     136,780    155,356
Reestimated recoverable - latest.......       15,651    23,211     24,617     38,724      40,738      43,585     56,959
Net reestimated liability - latest.....       39,991    49,593     59,109     66,351      72,492      93,195     98,397
Gross cumulative deficiency (excess)...      (14,451)  (15,680)   (15,168)    (9,547)     (4,882)     (4,629)     5,377

                                      -14-

Reinsurance

     DGI and the Mutual Company use several different reinsurers, all of which
have a Best rating of A- or better or, with respect to foreign reinsurers, have
a financial condition which, in the opinion of management, is equivalent to a
company with at least an A- rating.

     The external reinsurance purchased by DGI and the Mutual Company includes
"excess treaty reinsurance," under which losses are automatically reinsured over
a set retention ($250,000 for 2000), and "catastrophic reinsurance," under which
the reinsured recovers 95% of an accumulation of many losses resulting from a
single event, including natural disasters (for 2000, $3,000,000 retention).
DGI's principal reinsurance agreement in 2000, other than that with the Mutual
Company, was an excess of loss treaty in which the reinsurers were Dorinco
Reinsurance Company and Swiss Re America. Reinsurance is also purchased on an
individual policy basis to reinsure losses that may occur from large risks,
specific risk types or specific locations. The amount of coverage provided under
each of these types of reinsurance depends upon the amount, nature, size and
location of the risk being reinsured. For property insurance, excess of loss
treaties provide for coverage up to $1,000,000. For liability insurance, excess
of loss treaties provide for coverage up to $30,000,000. Property catastrophe
contracts provide coverage up to $80,000,000 resulting from one event. On both
property and casualty insurance, DGI and the Mutual Company purchase facultative
reinsurance to cover exposures from losses that exceed the limits provided by
their respective treaty reinsurance. Atlantic States cedes to the Mutual Company
all of its insurance business and assumes from the Mutual Company 70% (65% prior
to July 1, 2000) of the Mutual Company's total pooled insurance business,
including that assumed from Atlantic States and substantially all of the
business assumed and retained by the Mutual Company from Southern and Delaware
Atlantic. Atlantic States, Southern, Delaware Atlantic, Pioneer Ohio, Southern
Heritage and Pioneer New York each have a catastrophe reinsurance agreement with
the Mutual Company which limits the maximum liability under any one catastrophic
occurrence to $400,000, $300,000, $300,000, $200,000, $400,000 and $400,000
respectively, and $1,000,000 for a catastrophe involving more than one of the
companies. The Mutual Company and Delaware Atlantic have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $200,000 of
losses in excess of $50,000. The Mutual Company and Pioneer Ohio have an excess
of loss reinsurance agreement in which the Mutual Company assumes up to $200,000
of losses in excess of $50,000. The Mutual Company and Southern have an excess
of loss reinsurance agreement in which the Mutual Company assumes up to $25,000
of losses in excess of $100,000 and a quota share agreement whereby Southern
cedes 50% of its direct business less certain reinsurance to the Mutual Company.
Effective January 1, 2001, the Mutual Company and Pioneer New York have an
aggregate excess of loss reinsurance agreement whereby the Company reinsures
Pioneer New York against any loss, adjusted on a quarterly basis recalculated at
the end of each calendar quarter, from: (a) any adverse development in Pioneer
New York's loss reserve and loss adjustment expense reserve at December 31, 2002
compared to the amount of such reserves at December 31, 2000 in respect of all
policy years ending on or before

                                      -15-

December 31, 2000 and (b) all losses and loss adjustment expenses incurred by
Pioneer New York during the years ending December 31, 2001 and December 31, 2002
by reason of the fact that Pioneer New York's loss and loss adjustment expense
ratios for those periods exceeds 60%. Southern, Delaware Atlantic, Pioneer New
York, Pioneer Ohio and Southern Heritage each have retrocessional reinsurance
agreements with the Mutual Company, under which they cede, and then assume back,
100% of their business net of other reinsurance, except for Pioneer New York,
which assumes back 90% of its business.

Competition

     The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for this
business in the geographic areas where the Company operates, many of which are
substantially larger and have greater financial resources than DGI, and no
single company dominates. In addition, because the insurance products of DGI and
the Mutual Company are marketed exclusively through independent insurance
agencies, most of which represent more than one company, DGI faces competition
to retain qualified independent agencies, as well as competition within
agencies.

Investments

     DGI's return on invested assets is an important element of its financial
results. Currently, the investment objective is to maintain a widely diversified
fixed maturities portfolio structured to maximize after-tax investment income
while minimizing credit risk through investments in high quality instruments. At
December 31, 2000, all debt securities were rated investment grade with the
exception of one unrated obligation of $240,000, and the investment portfolio
did not contain any mortgage loans or any non-performing assets.

                                      -16-

     The following table shows the composition of the debt securities investment
portfolio (at carrying value), excluding short-term investments, by rating as of
December 31, 2000:

                                                                   December 31, 2000
                                                             ----------------------------
Rating(1)                                                     Amount              Percent
- ---------                                                    --------             -------
                                                                 (dollars in thousands)
                                                                              
U.S. Treasury and U.S. agency
   securities(2)................................             $122,597               48.7%

Aaa or AAA......................................               56,278               22.3
Aa or AA........................................               39,365               15.6
A ..............................................               33,184               13.2
BBB ............................................                  350                0.1
Not rated(3) ...................................                  240                0.1
                                                             --------             ------
     Total......................................             $252,014                100%
                                                             ========             ======

- ----------

(1)  Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
     Corporation.

(2)  Includes mortgage-backed securities of $18.8 million.

(3)  Represents one unrated obligation of The Lancaster County Hospital
     Authority Mennonite Home Project which management of DGI believes to be
     equivalent to investment grade securities with respect to repayment risk.

     DGI invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. Such strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 33.7%, 37.3%, and 34.1% of the total investment portfolio at
December 31, 2000, 1999 and 1998, respectively.

                                      -17-

     The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 2000, 1999 and 1998.

                                                                         December 31,
                                        --------------------------------------------------------------------------------
                                                 2000                          1999                         1998
                                        ----------------------         ---------------------       ---------------------
                                                        Percent                      Percent                     Percent
                                                          of                           of                          of
                                           Amount        Total         Amount         Total        Amount         Total
                                           ------       -------        ------        -------       ------        -------
                                                                      (dollars in thousands)
                                                                                               
Fixed maturities(1):
 Held to maturity:
 U.S. Treasury securities
 and obligations of U.S.
 government corporations
 and agencies...................             $37,072     13.1%          $36,861       14.1%          $32,891       12.9%
Canadian government
 obligation.....................                 499      0.2               498        0.2                --         --
Obligations of states and
 political subdivisions.........              66,831     23.6            67,824       25.9            66,941       26.2
Corporate securities............              21,320      7.5            15,819        6.1             9,131        3.6
Mortgage-backed
 securities.....................              14,301      5.1            15,172        5.8            18,221        7.1
                                            --------    -----          --------      -----          --------     ------
Total held to
 maturity.......................             140,023     49.5           136,174       52.1           127,184       49.8
                                             -------     ----           -------       ----           -------    -------
Available for sale:
 U.S. Treasury securities
 and obligations of U.S.
 government corporations
 and agencies...................              66,687     23.6            61,205       23.4            55,439       21.8
Obligations of states and
 political subdivisions.........              18,057      6.4            20,223        7.7            19,957        7.8
Corporate securities............              22,710      8.0            15,053        5.8            10,787        4.2
Mortgage-backed
 securities.....................               4,537      1.6             3,563        1.4             4,342        1.7
                                          ----------    -----         ---------      -----           -------     ------
  Total available
  for sale......................             111,991     39.6           100,044       38.3            90,525       35.5
                                            --------     ----           -------       ----            ------   --------
  Total fixed
  maturities....................             252,014     89.1           236,218       90.4           217,709       85.3
  Equity securities(2)..........              12,053      4.3             9,229        3.5             6,764        2.7
  Short-term
  investments(3)................              18,584      6.6            15,995        6.1            30,522       12.0
                                           ---------   ------         ---------    -------          --------    -------
  Total investments.............            $282,651    100.0%         $261,442      100.0%         $254,995      100.0%
                                            ========    ======         ========      ======         ========      ======

                                      -18-

(1)  The Company accounts for its investments in accordance with Statement of
     Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain
     Investments in Debt and Equity Securities." See Notes 1 and 4 to the
     Consolidated Financial Statements incorporated by reference herein. Fixed
     maturities held to maturity are valued at amortized cost; those fixed
     maturities available for sale are valued at fair value. Total fair value of
     fixed maturities held to maturity was $141,488,936 at December 31, 2000,
     $133,995,994 at December 31, 1999 and $131,633,299 at December 31, 1998.
     The amortized cost of fixed maturities available for sale was $111,905,848
     at December 31, 2000, $103,419,994 at December 31, 1999 and $89,089,995 at
     December 31, 1998.

(2)  Equity securities are valued at fair value. Total cost of equity securities
     was $12,476,948 at December 31, 2000, $9,043,818 at December 31, 1999 and
     $6,206,735 at December 31, 1998.

(3)  Short-term investments are valued at cost, which approximates market.

     The following table sets forth the maturities (at carrying value) in the
fixed maturity and short-term investment portfolio at December 31, 2000,
December 31, 1999 and December 31, 1998.

                                                                         December 31,
                                        --------------------------------------------------------------------------------
                                                 2000                          1999                         1998
                                        ----------------------         ---------------------       ---------------------
                                                        Percent                      Percent                     Percent
                                                          of                           of                          of
                                           Amount        Total         Amount         Total        Amount         Total
                                           ------       -------        ------        -------       ------        -------
                                                                      (dollars in thousands)
                                                                                               
Due in:(1)
One year or less..............            $35,875        13.2%          $34,007        13.5%        $47,760        19.2%
Over one year
Through three years...........             34,219        12.6            27,107        10.8          31,964        12.9
Over three years
Through five years............             40,883        15.1            30,878        12.2          23,139         9.3
Over five years
Through ten years.............            112,194        41.5           104,883        41.6          78,061        31.4
Over ten years
Through fifteen years.........             22,144         8.2            30,478        12.1          37,940        15.3
Over fifteen years............              6,445         2.4             6,125         2.4           6,805         2.8
Mortgage-backed
 securities...................             18,838         7.0            18,735         7.4          22,563         9.1
                                         --------       -----          --------       -----        --------       -----
                                         $270,598       100.0%         $252,213       100.0%       $248,232       100.0%
                                         ========       ======         ========       ======       ========       ======

- ----------

                                      -19-

(1)  Based on stated maturity dates with no prepayment assumptions. Actual
     maturities will differ because borrowers may have the right to call or
     prepay obligations with or without call or prepayment penalties.

     As shown above, the Company held investments in mortgage-backed securities
having a carrying value of $18.8 million at December 31, 2000. Included in these
investments are collateralized mortgage obligations ("CMOs") with a carrying
value of $10 million at December 31, 2000. The Company has attempted to reduce
the prepayment risks associated with mortgage-backed securities by investing
approximately 99%, as of December 31, 2000, of the Company's holdings of CMOs in
planned amortization and very accurately defined tranches. Such investments are
designed to alleviate the risk of prepayment by providing predictable principal
prepayment schedules within a designated range of prepayments. If principal is
repaid earlier than originally anticipated, investment yields may decrease due
to reinvestment of the proceeds at current interest rates (which may be lower)
and capital gains or losses may be realized since the book value of securities
purchased at premiums or discounts may be different from the prepayment amount.

     Investment results of DGI and its subsidiaries for the years ended December
31, 2000, 1999 and 1998 are shown in the following table:

                                                             Year Ended December 31,
                                        -------------------------------------------------------------
                                                 2000                1999                 1998
                                               --------            --------             --------
                                                           (dollars in thousands)
                                                                               
Invested assets(1)................             $276,600            $264,293             $208,304
Investment income(2)..............               15,992              13,224               11,998
Average yield.....................                  5.8%                5.0%                 5.6%

- ----------------

(1)  Average of the aggregate invested amounts at the beginning and end of the
     period, including cash.

(2)  Investment income is net of investment expenses and does not include
     realized investment gains or losses or provision for income taxes.

A.M. Best Rating

     Currently, the A.M. Best rating of the Mutual Company, Atlantic States,
Southern, Delaware Atlantic, Southern Heritage, Pioneer Ohio and Pioneer New
York was "A", based upon their respective current financial conditions and
historical statutory results of operations. Management believes that this Best
rating is an important factor in marketing DGI's products to its agents and
customers. Best's ratings are industry ratings based on a comparative analysis
of the financial condition and operating performance of insurance

                                      -20-

companies as determined by their publicly available reports. Best's
classifications are A++ and A+ (Superior), A and A- (Excellent), B++ and B+
(Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (below
minimum standards) and E and F (Liquidation). Best's ratings are based upon
factors relevant to policyholders and are not directed toward the protection of
investors. According to Best, an "excellent" rating is assigned to those
companies which, in Best's opinion, have achieved excellent overall performance
when compared to the norms of the property and casualty insurance industry and
have generally demonstrated a strong ability to meet policyholder and other
contractual obligations.

Regulation

     Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, premium rates
for property and casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.

     In addition to state-imposed insurance laws and regulations, in December
1993 the National Association of Insurance Commissioners (the "NAIC") adopted a
risk-based capital system for assessing the adequacy of statutory capital and
surplus which augments the states' current fixed dollar minimum capital
requirements for insurance companies. At December 31, 2000, DGI's insurance
subsidiaries and the Mutual Company each exceeded the required levels of
capital. There can be no assurance that the capital requirements applicable to
DGI's insurance subsidiaries will not increase in the future.

     The states in which Atlantic States (Pennsylvania, Maryland and Delaware),
the Mutual Company (Pennsylvania, Ohio, Maryland, New York, Virginia, Delaware
and North Carolina), Southern (Virginia and Pennsylvania), Delaware Atlantic
(Delaware, Maryland and Pennsylvania), Pioneer Ohio (Ohio and Pennsylvania),
Southern Heritage (Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi,
North Carolina, South Carolina, Tennessee and Virginia) and Pioneer New York
(Connecticut and New York) are licensed to do business have guaranty fund laws
under which insurers doing business in such states can be assessed on the basis
of premiums written by the insurer in that state in order to fund policyholder
liabilities of insolvent insurance companies. Under these laws in general, an

                                      -21-

insurer is subject to assessment, depending upon its market share of a given
line of business, to assist in the payment of policyholder claims against
insolvent insurers. The Mutual Company, Atlantic States, Southern, Delaware
Atlantic, Pioneer Ohio, Pioneer New York and Southern Heritage have made
accruals for their portion of assessments related to such insolvencies based
upon the most current information furnished by the guaranty associations. During
1998, 1999 and 2000, the Company received assessments totaling $1.3 million,
$726,000 and $813,000, respectively, from the Pennsylvania Insurance Guaranty
Association relating to the insolvency of two medical malpractice insurers.

     Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies within
the holding company system that may materially affect the operations, management
or financial condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine the Mutual Company, the
Company and the Company's insurance subsidiaries at any time, require disclosure
of material transactions by the holding company and require prior notice or
prior approval of certain transactions, such as "extraordinary dividends" from
the insurance subsidiaries to the holding company.

     All transactions within the holding company system affecting the Mutual
Company and the Company's insurance subsidiaries must be fair and equitable.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In some
states, including Pennsylvania, the acquisition of 10% or more of the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control. Pursuant to an order issued in October 1998, the
Pennsylvania Insurance Department has approved the Mutual Company's ownership of
up to 65% of the outstanding Common Stock of DGI. These laws also require notice
to the applicable insurance commissioner of certain material transactions
between an insurer and any person in its holding company system and, in some
states, certain of such transactions cannot be consummated without the prior
approval of the applicable insurance commissioner.

     The Company's insurance subsidiaries are restricted by the insurance laws
of their respective states of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior approval of the
respective state regulatory authorities. Generally, the maximum amount that may
be paid by an insurance subsidiary during any year after notice to, but without
prior approval of, the insurance commissioners of these states is limited to a
stated percentage of that subsidiary's statutory capital and surplus as of a
certain date, or the net income or net investment income not including realized
capital gains of the subsidiary for the preceding year. As of December 31, 2000,
amounts available for payment of dividends in 2001 without the prior approval of
the various insurance commissioners were $5,414,419 from Atlantic States,
$908,259 from Southern, $323,992 from Delaware Atlantic, $581,132 from Pioneer
Ohio and $973,796 from

                                      -22-

Southern Heritage. See Note 12 to the Consolidated Financial Statements
incorporated by reference herein.

     The NAIC has adopted the Codification of Statutory Accounting Principles
with an effective date of January 1, 2001. The codified principles are intended
to provide a basis of accounting recognized and adhered to in the absence of
conflict with, or silence of, state statutes and regulations. The impact of the
codified principles on the statutory capital and surplus of the Company's
insurance subsidiaries is not expected to decrease statutory capital and surplus
as of January 1, 2001.

The Mutual Company

     The Mutual Company, which was organized in 1889, has a Best rating of A
(Excellent). At December 31, 2000, the Mutual Company had admitted assets of
$151,103,813 and policyholders' surplus of $65,575,094. At December 31, 2000,
the Mutual Company had no debt and, of its total liabilities of $85,528,719,
reserves for net losses and loss expenses accounted for $48,177,588 and unearned
premiums accounted for $23,527,705. Of the Mutual Company's investment portfolio
of $105,382,513 at December 31, 2000, investment-grade bonds accounted for
$37,867,088, cash and short-term investments accounted for $(3,466,626) and
mortgages accounted for $9,812,323. At December 31, 2000, the Mutual Company
owned 5,511,128 shares of the Company's Common Stock, which were carried on the
Mutual Company's books at $47,340,593. The foregoing financial information is
presented on the statutory basis of accounting.

Employees

     As of December 31, 2000, the Mutual Company had 430 employees. The Mutual
Company's employees provide a variety of services to DGI, Atlantic States,
Delaware Atlantic, Southern, Southern Heritage, Pioneer New York and Pioneer
Ohio, as well as to the Mutual Company and its subsidiaries.

Item 2.   Properties.

          DGI, Atlantic States and Delaware Atlantic share headquarters with the
Mutual Company's headquarters in a building owned by the Mutual Company. The
Mutual Company charges DGI for an appropriate portion of the building expenses
under an intercompany allocation agreement which is consistent with the terms of
the pooling agreement. The headquarters of the Mutual Company has approximately
163,500 square feet of office space. Southern has a facility of approximately
10,000 square feet in Glen Allen, Virginia, which it owns. Pioneer Ohio has a
facility of approximately 10,000 square feet in Greenville, Ohio, which it owns.
Southern Heritage has a facility of approximately 14,000 square feet in Duluth,
Georgia, which it leases. Pioneer New York has a facility of approximately
10,000 square feet in Greenville, New York, which it owns. Province Bank leases
approximately 3,600 square feet of a building located in Marietta, Pennsylvania
owned

                                      -23-

by the Mutual Company. The Mutual Company charges Province Bank an annual rent
based on an independent appraisal.

Item 3.   Legal Proceedings.

          DGI is a party to numerous lawsuits arising in the ordinary course of
its insurance business. DGI believes that the resolution of these lawsuits will
not have a material adverse effect on its financial condition or results of
operations.

Item 4.   Submission of Matters to a Vote of Security Holders.

          No matter was submitted to a vote of holders of the Company's Common
Stock during the fourth quarter of 2000.

Executive Officers of the Company

       Name                     Age                           Position
       ----                     ---                           --------
                                      
Donald H. Nikolaus              58          President and Chief Executive Officer since 1981
Ralph G. Spontak                48          Senior Vice President since 1991; Chief Financial Officer and Vice
                                            President since 1983; Secretary since 1988
Cyril J. Greenya                56          Senior Vice President - Commercial Underwriting since 1997; Vice
                                            President - Commercial Underwriting for five years prior thereto;
                                            Manager - Commercial Underwriting for nine years prior thereto
Robert G. Shenk                 48          Senior Vice President - Claims since 1997; Vice President - Claims for
                                            five years prior thereto
William H. Shupert              74          Senior Vice President - Underwriting since 1991; Vice President -
                                            Underwriting for 18 years prior thereto
Daniel J. Wagner                40          Treasurer since 1993; Controller for five years prior thereto
James B. Price                  65          Senior Vice President - Claims since 1997; Vice President - Claims for
                                            five years prior thereto.

                                      -24-

                                     PART II

Item 5.   Market for the Registrant's Common Equity and Related
          Stockholder Matters.

          The response to this Item is incorporated in part by reference to page
31 of the Company's Annual Report to Stockholders for the year ended December
31, 2000, which is included as Exhibit (13) to this Form 10-K Report. As of
March 15, 2001, the Company had approximately 649 holders of record of its
Common Stock. The Company declared dividends of $.36 per share in 2000 and $.36
per share in 1999.

Item 6.   Selected Financial Data.

          The response to this Item is incorporated by reference to page 1 of
the Company's Annual Report to Stockholders for the year ended December 31,
2000, which is included as Exhibit (13) to this Form 10-K Report.

Item 7.   Management's Discussion and Analysis of Financial Condition
          and Result of Operations.

          The response to this Item is incorporated by reference to pages 10
through 12 of the Company's Annual Report to Stockholders for the year ended
December 31, 2000, which is included as Exhibit (13) to this Form 10-K Report.

Item 8.   Financial Statements and Supplementary Data.

          The response to this Item is incorporated by reference to pages 13
through 28 of the Company's Annual Report to Stockholders for the year ended
December 31, 2000, which is included as Exhibit (13) to this Form 10-K Report.

Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure.

          None.

                                      -25-

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

          The response to this Item with respect to the Company's directors is
incorporated by reference to pages 7 through 9 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 19,
2001. The response to this Item with respect to the Company's executive officers
is incorporated by reference to Part I of this Form 10-K Report.

Item 11.  Executive Compensation.

          The response to this Item is incorporated by reference to pages 9
through 12 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 19, 2001, except for the Report of
Compensation Committee, the Performance Graph and the Report of the Audit
Committee which are not incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners
          and Management.

          The response to this Item is incorporated by reference to pages 3
through 5 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 19, 2001.

Item 13.  Certain Relationships and Related Transactions.

          The response to this Item is incorporated by reference to pages 3
through 7 and page 14 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 19, 2001.

                                      -26-

                                     PART IV

                                                                                                             
Item 14.  Exhibits, Financial Statement Schedules and Reports
          on Form 8-K.

          (a)  Financial statements, financial statement schedules and exhibits
               filed:

    (1)   Consolidated Financial Statements
                                                                                                                 Page*
                                                                                                                 ----

          Report of Independent Auditors

          Donegal Group Inc. and Subsidiaries:
            Consolidated Balance Sheets as of
              December 31, 2000 and 1999...................................................................       13
            Consolidated Statements of Income and
              Comprehensive Income for the three years ended
              December 31, 2000, 1999 and 1998.............................................................       14
            Consolidated Statements of Stockholders'
              Equity for the three years ended
              December 31, 2000, 1999 and 1998.............................................................       15
            Consolidated Statement of Cash Flow
              for the three years ended
              December 31, 2000, 1999 and 1998.............................................................       16
          Notes to Consolidated Financial Statements

    (2)   Financial Statement Schedules
                                                                                                                  Page
          Donegal Group Inc. and Subsidiaries

          Independent Auditors' Consent and Report on Schedules                                                 Exhibit 23
          Schedule I.               Summary of Investments - Other
                                    Than Investments in Related Parties....................................       33
          Schedule II.              Condensed Financial Information of Parent Company......................       34
          Schedule III.             Supplementary Insurance Information....................................       37
          Schedule IV.              Reinsurance............................................................       39
          Schedule VI.              Supplemental Insurance Information Concerning Property
                                    and Casualty Subsidiaries..............................................       40

          All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.

- -------------

                                      -27-

*         Refers to the respective page of Donegal Group Inc.'s 2000 Annual
Report to Stockholders. The Consolidated Financial Statements and Notes to
Consolidated Financial Statements and Auditor's Report thereon on pages 13
through 28 are incorporated herein by reference. With the exception of the
portions of such Annual Report specifically incorporated by reference in this
Item and Items 5, 6, 7 and 8 hereof, such Annual Report shall not be deemed
filed as part of this Form 10-K Report or otherwise subject to the liabilities
of Section 18 of the Securities Exchange Act of 1934.

          (3)      Exhibits

      Exhibit No.                                   Description of Exhibits                                    Reference
      -----------                                   -----------------------                                    ---------
                                                                                                      
        (3)(i)           Certificate of Incorporation of Registrant, as amended                                   (m)
        (3)(ii)          Amended and Restated By-laws of Registrant                                               (a)

        Management Contracts and Compensatory Plans or Arrangements
        -----------------------------------------------------------
                                                                                                      
        (10)(A)          Donegal Group Inc. Agency Stock Purchase Plan                                            (k)
        (10)(B)          Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan                       (d)
        (10)(C)          Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for
                         Directors                                                                                (j)
        (10)(D)          Donegal Group Inc. Executive Restoration Plan                                            (c)
        (10)(E)          Donegal Mutual Insurance Company 401(k) Plan                                             (m)
        (10)(F)          Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company
                         401(k) Plan                                                                              (m)
        (10)(G)          Donegal Group Inc. 2001 Equity Incentive Plan for Employees                        Filed herewith
        (10)(H)          Donegal Group Inc. 2001 Equity Incentive Plan for Directors                        Filed herewith
        (10)(I)          Donegal Group Inc. 2001 Employee Stock Purchase Plan                               Filed herewith
        (10)(J)          Donegal Group Inc. 2001 Agency Stock Purchase Plan                                 Filed herewith

        Other Material Contracts
        ------------------------
                                                                                                      
        (10)(K)          Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and
                         Atlantic States Insurance Company                                                        (b)
        (10)(L)          Services Allocation Agreement dated September 29, 1986 between Donegal Mutual
                         Insurance Company, Donegal Group, Inc. and Atlantic States Insurance Company             (b)
        (10)(M)          Proportional Reinsurance Agreement dated September 29, 1986 between Donegal
                         Mutual Insurance Company and Atlantic States Insurance Company                           (b)

                                      -28-

      Exhibit No.                                   Description of Exhibits                                    Reference
      -----------                                   -----------------------                                    ---------
                                                                                                      
        (10)(N)          Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between
                         Donegal Mutual Insurance Company and Atlantic States Insurance Company                   (e)
        (10)(O)          Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993
                         between Donegal Mutual Insurance Company, Southern Insurance Company of
                         Virginia, Atlantic States Insurance Company and Pioneer Mutual Insurance
                         Company, and Christiana General Insurance Corporation of New York, Cologne
                         Reinsurance Company of America, Continental Casualty Company, Employers
                         Reinsurance Corporation and Munich American Reinsurance Company                          (g)
        (10)(P)          Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between
                         Donegal Mutual Insurance Company and Atlantic States Insurance Company                   (f)
        (10)(Q)          Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement
                         between Donegal Mutual Insurance Company and Atlantic States Insurance Company           (h)
        (10)(R)          Stock Purchase Agreement dated as of December 21, 1995 between Donegal Mutual
                         Insurance Company and Donegal Group Inc.                                                 (h)
        (10)(S)          Donegal Group Inc. 1996 Employee Stock Purchase Plan                                     (i)
        (10)(T)          Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
                         Mutual Insurance Company and Pioneer Insurance Company                                   (c)
        (10)(U)          Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
                         Mutual Insurance Company and Delaware American Insurance Company                         (c)
        (10)(V)          Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
                         Mutual Insurance Company and Southern Insurance Company of Virginia                      (c)
        (10)(W)          Reinsurance and Retrocession Agreement effective January 1, 2000 between
                         Donegal Mutual Insurance Company and Southern Heritage Insurance Company                 (m)
        (10)(X)          Property Catastrophe Excess of Loss Reinsurance Agreement effective
                         January 1, 2000 between Donegal Mutual Insurance Company and Southern Heritage
                         Insurance Company                                                                        (m)

                                      -29-

      Exhibit No.                                   Description of Exhibits                                    Reference
      -----------                                   -----------------------                                    ---------
                                                                                                      
        (10)(Y)          Stock Purchase Agreement dated as of May 14, 1998 between Donegal Group Inc.
                         and Southern Heritage Limited Partnership                                                (l)
        (10)(Z)          Amendment dated November 17, 1998 to Stock Purchase Agreement dated as of
                         May 14, 1998 between Donegal Group Inc. and Southern Heritage Limited Partnership        (l)
       (10)(AA)          Amended and Restated Credit Agreement dated as of July 27, 1998 among Donegal
                         Group Inc., the banks and other financial institutions from time to time
                         party thereto and Fleet National Bank, as Agent                                          (l)
       (10)(BB)          First Amendment and Waiver to the Amended and Restated Credit Agreement dated
                         as of December 31, 1999                                                                  (m)
       (10)(CC)          Stock Purchase Agreement dated as of July 20, 2000 between Donegal Mutual
                         Insurance Company and Donegal Group Inc.                                           Filed herewith
       (10)(DD)          Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement
                         between Donegal Mutual Insurance Company and Atlantic States Insurance Company           (n)
       (10)(EE)          Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance
                         Company and Province Bank FSB                                                      Filed herewith
       (10)(FF)          Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001
                         between Donegal Mutual Insurance Company and Pioneer Insurance Company             Filed herewith
         (13)            2000 Annual Report to Stockholders (electronic filing contains only those
                         portions incorporated by reference into this Form 10-K Report)                     Filed herewith
         (20)            Proxy Statement relating to the Annual Meeting of Stockholders to be held on
                         April 19, 2001, provided, however, that the Report of
                         the Compensation Committee, the Performance Graph and
                         the Report of the Audit Committee shall not be deemed
                         filed as part of this Form 10-K Report                                                   (o)
         (21)            Subsidiaries of Registrant                                                         Filed herewith
         (23)            Consent of Independent Auditors                                                    Filed herewith

- ------------------

(a)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-Q Report for the quarter ended
     September 30, 1998.

                                      -30-

(b)  Such exhibit is hereby incorporated by reference to the like-described
     exhibits in Registrant's Form S-1 Registration Statement No. 33-8533
     declared effective October 29, 1986.

(c)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1996.

(d)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1998.

(e)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1988.

(f)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1992.

(g)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
     declared effective September 29, 1993.

(h)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated December 21, 1995.

(i)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-8 Registration Statement No. 333-1287 filed
     February 29, 1996.

(j)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1997.

(k)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
     declared effective August 1, 1996.

(l)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated November 17, 1998.

(m)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrants' Form 10-K Report for the year ended December 31,
     1999.

(n)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated June 19, 2000.

(o)  Such exhibit is hereby incorporated by reference to the Registrant's
     definitive proxy statement filed March 29, 2001.

                                      -31-

                  (b)      Reports on Form 8-K:

                  None.

                                      -32-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

                       SCHEDULE I -- SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                ($ in thousands)

                                December 31, 2000

                                                                                                 Amount at Which
                                                                                 Fair             Shown in the
                                                             Cost               Value             Balance Sheet
                                                       -------------------------------------------------------------
                                                                                           
Fixed Maturities:
 Held to maturity:
   United States government and
   Governmental agencies and
   authorities including obligations
   of states and political subdivision                       $103,903          $105,425             $103,903
   Canadian government obligation                                 499               510                  499
   All other corporate bonds                                   21,320            21,346               21,320
   Mortgage-backed securities                                  14,301            14,208               14,301
                                                             --------         ---------             --------
   Total fixed maturities
    Held to maturity                                          140,023           141,489              140,023
                                                              -------           -------              -------
 Available for sale:
   United States government and
   Governmental agencies and
   Authorities including obligations
   of states and political subdivision                         84,562            84,744               84,744
   All other corporate bonds                                   22,703            22,710               22,710
   Mortgage-backed securities                                   4,641             4,537                4,537
                                                            ---------           -------              -------
   Total fixed maturities
    Available for sale                                        111,906           111,991              111,991
                                                              -------           -------              -------
   Total fixed maturities                                     251,929           253,480              252,014
                                                              -------           -------              -------
Equity Securities:
   Preferred stocks
   Public utilities                                               228               231                  231
   Banks                                                        4,159             4,066                4,066
   Industrial and miscellaneous                                  1,365            1,325                1,325
                                                               -------          -------              -------
   Total preferred stocks                                       5,752             5,622                5,622
                                                              -------           -------              -------
   Common stocks
   Banks and insurance companies                                2,866             3,554                3,554
   Industrial and miscellaneous                                 3,859             2,877                2,877
                                                              -------           -------              -------
   Total common stocks                                          6,725             6,431                6,431
                                                              -------           -------              -------
   Total equity securities                                     12,477            12,053               12,053
                                                               ------            ------               ------
Short-term investments                                         18,584            18,584               18,584
                                                            ---------         ---------           ----------
   Total investments                                         $282,990          $284,117             $282,651
                                                             ========          ========             ========

                                      -33-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

         SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

                            Condensed Balance Sheets
                                ($ in thousands)

                           December 31, 2000 and 1999

                    ASSETS
                                                         2000            1999
                                                       --------        --------
Investment in subsidiaries (equity method)             $150,774        $138,702
Cash                                                      2,381             371
Property and equipment                                    1,997           2,232
Other                                                       715             750
                                                       --------        --------
         Total assets                                  $155,867        $142,055
                                                       ========        ========

       LIABILITIES AND STOCKHOLDERS' EQUITY

                                                         2000            1999
                                                       --------        --------
Cash dividends declared to stockholders               $     797            $761
Line of credit                                           40,000          37,000
Other                                                     1,325             879
                                                       --------        --------
Total liabilities                                        42,122          38,640
                                                       --------        --------

Stockholders' equity                                    113,745         103,415
                                                       --------        --------
Total liabilities and stockholders' equity             $155,867        $142,055
                                                       ========        ========

                                      -34-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

         SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
                                   (Continued)
                         Condensed Statements of Income
                                ($ in thousands)

                  Years ended December 31, 2000, 1999 and 1998

                                         2000           1999           1998
                                   ---------------------------------------------
Revenues

Dividends-subsidiary                    $3,900           $820         $1,000
Lease income                               837            819            754
Investment income                           29             46             22
                                        ------          -----         ------
Total revenues                           4,766          1,685          1,776

Expenses

Operating expenses                       1,165            938            718
Interest                                 3,304          2,463          1,293
                                        ------          -----         ------
Total expenses                           4,469          3,401          2,011
                                        ------          -----         ------

Income (loss) before income
 tax benefit and equity in
 undistributed net income of
 subsidiaries                              297         (1,716)          (235)

Income tax benefit                      (1,226)          (807)          (413)
                                        ------          -----         ------

Income (loss) before equity in
 undistributed net income of
 subsidiaries                            1,523           (909)           178

Equity in undistributed net
 income of subsidiaries                  7,364          7,566          8,840
                                        ------          -----         ------

Net income                              $8,887         $6,657         $9,018
                                        ======         ======         ======

                                      -35-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

              SCHEDULE II -- CONDENSED INFORMATION OF PARENT COMPANY

                       Condensed Statements of Cash Flows
                                ($ in thousands)

                  Years ended December 31, 2000, 1999 and 1998

                                                                      2000              1999               1998
                                                                    -----------------------------------------------
                                                                                                  
Cash flows from operating activities:
Net income                                                            $8,887             $6,657            $9,018
                                                                      ------             ------            ------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed net income of
Subsidiaries                                                          (7,364)            (7,566)           (8,840)
Other                                                                  1,123              2,365              (921)
                                                                      ------             ------            ------
Net adjustments                                                       (6,241)            (5,201)           (9,761)
                                                                      ------             ------            ------
Net cash provided by (used in) operating
 activities                                                            2,646              1,456              (743)
                                                                      ------             ------            ------

Cash flows from investing activities:
Net purchase of property and equipment                                  (262)              (426)             (564)
Capital contribution to subsidiaries                                     ---                ---            (2,000)
Sale of subsidiary                                                       ---                100               ---
Acquisition of Donegal Financial                                       3,042                ---               ---
Acquisition of Southern Heritage                                         ---                ---           (18,028)
Other                                                                     38               (426)           (5,613)
                                                                      ------             ------            ------
Net cash used in investing activities                                 (3,266)              (752)          (26,205)
                                                                      ------             ------            ------

Cash flows from financing activities:
Cash dividends paid                                                   (3,127)            (2,946)           (2,664)
Issuance of common stock                                               2,757              2,514             2,481
Line of credit, net                                                    3,000               (500)           27,000
                                                                      ------             ------            ------
Net cash provided by (used in) financing
 activities                                                            2,630               (932)           26,817
                                                                      ------             ------            ------

Net change in cash                                                     2,010               (228)             (131)
Cash beginning                                                           371                599               730
                                                                      ------             ------            ------
Cash ending                                                           $2,381               $371              $599
                                                                      ======               ====              ====

                                      -36-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

               SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
                                ($ in thousands)

                  Years Ended December 31, 2000, 1999 and 1998

                                                                                   Amortization
                                                                                   of Deferred
                                         Net            Net          Net Losses       Policy          Other              Net
                                       Earned        Investment       And Loss     Acquisition     Underwriting       Premiums
              Segment                 Premiums         Income         Expense        Costs           Expenses         Written
              -------                 ----------------------------------------------------------------------------------------
                                                                                                    
            Year Ended
         December 31, 2000
         -----------------

   Personal Lines                     $ 95,199       $     --       $ 66,751         $15,849         $ 14,340         $ 98,653
   Commercial Lines                     54,515             --         36,391           9,076            8,212           59,551
   Investments                              --         15,992             --              --               --               --
                                      --------       --------       --------         -------         --------         --------
                                      $149,714       $ 15,992       $103,142         $24,925         $ 22,552         $158,204
                                      ========       ========       ========         =======         ========         ========

            Year Ended
         December 31, 1999
         -----------------

   Personal Lines                     $ 96,167       $     --       $ 67,582         $16,448         $ 19,801         $ 91,424
   Commercial Lines                     47,707             --         31,623           8,160            8,234           50,432
   Investments                              --         13,224             --              --               --               --
                                      --------       --------       --------         -------         --------         --------
                                      $143,874       $ 13,224       $ 99,205         $24,608         $ 28,035         $141,856
                                      ========       ========       ========         =======         ========         ========

            Year Ended
         December 31, 1998
         -----------------

   Personal Lines                     $ 71,676       $     --       $ 49,141         $12,614         $ 14,052         $ 73,070
   Commercial Lines                     44,493             --         24,026           6,876            7,660           45,084
   Investments                              --         11,998             --              --               --               --
                                      --------       --------       --------         -------         --------         --------
                                      $116,169       $ 11,998       $ 73,167         $19,490         $ 21,712         $118,154
                                      ========       ========       ========         =======         ========         ========

                                      -37-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

          SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
                                ($ in thousands)

                                                                  At December 31,
                                          --------------------------------------------------------------
                                            Deferred        Liability                       Other Policy
                                             Policy        For Losses                        Claims and
                                           Acquisition      And Loss         Unearned         Benefits
                   Segment                   Costs          Expenses         Premiums         Payable
                   -------                ------------     ----------        --------       ------------
                                                                                    
                    2000
                    ----

Personal Lines                            $  6,533         $ 80,647          $ 60,329           $--

Commercial Lines                             5,487           83,252            50,672            --

Investments                                     --               --                --            --
                                          --------         --------          --------          ----

                                          $ 12,020         $163,899          $111,001           $--
                                          ========         ========          ========          ====

                    1999
                    ----

Personal Lines                            $  6,936         $ 79,085          $ 60,886           $--

Commercial Lines                             4,267           70,894            36,771            --

Investments                                     --               --                --            --
                                          --------         --------          --------          ----

                                          $ 11,203         $149,979          $ 97,657           $--
                                          ========         ========          ========          ====

                                      -38-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

                            SCHEDULE IV -- REINSURANCE

                                                                   Ceded             Assumed                          Percentage
                                                  Gross           To Other          from Other            Net          Assumed
                                                  Amount          Companies         Companies            Amount         To Net
                                               -----------       -----------       ------------       ------------    ----------
                                                                                                          
                Year Ended
             December 31, 2000
             -----------------

Property and casualty premiums                 $93,302,656       $75,784,740       $132,195,646       $149,713,562       88%
                                               ===========       ===========       ============       ============       ==

                Year Ended
             December 31, 1999
             -----------------

Property and casualty premiums                 $91,996,926       $67,487,819       $119,364,863       $143,873,970       83%
                                               ===========       ===========       ============       ============       ==

                Year Ended
             December 31, 1998
             -----------------

Property and casualty premiums                 $61,173,134       $56,338,098       $111,333,956       $116,168,992       96%
                                               ===========       ===========       ============       ============       ==

                                      -39-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

                SCHEDULE VI -- SUPPLEMENTARY INSURANCE INFORMATION
                  CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES

                                                                                     Discount,
                                     Deferred                 Liability               if any,
                                      Policy                  For Losses             Deducted
                                    Acquisition                And Loss                From               Unearned
                                       Costs                   Expenses              Reserves             Premiums
                                    -----------              ------------          ------------         ------------
                                                                                           
             At December 31,

                  2000              $12,020,257              $163,899,270              $--              $111,000,905
                                    ===========              ============              ===              ============

                  1999              $11,203,302              $149,979,141              $--              $ 97,657,020
                                    ===========              ============              ===              ============

                  1998              $11,334,301              $141,409,008              $--              $ 94,722,785
                                    ===========              ============              ===              ============

                                                                                                            (continued)

                                      -40-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

                SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
            CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED

                  Years ended December 31, 2000, 1999 and 1998

                                                                                       Losses and Loss
                                                                                     Expenses Related to
                                                                              -----------------------------------
                                                                                            Amortization
                                                                                            of Deferred       Net
                                     Net                                                      Policy      Paid Losses       Net
                                    Earned      Investment       Current        Prior       Acquisition     And Loss     Premiums
                                   Premiums       Income          Year          Years          Costs        Expenses      Written
                                 ------------   -----------   ------------   -----------    -----------   -----------   ------------
                                                                                                   
   Year Ended
December 31, 2000                $149,713,562   $15,992,495   $102,222,144   $   919,761    $24,925,000   $99,342,386   $158,204,697
                                 ============   ===========   ============   ===========    ===========   ===========   ============

   Year Ended
December 31, 1999                $143,873,970   $13,223,537   $ 99,659,002   $  (454,000)   $24,608,000   $95,574,426   $141,856,479
                                 ============   ===========   ============   ===========    ===========   ===========   ============

   Year Ended
December 31, 1998                $116,168,992   $11,997,661   $ 75,463,085   $(2,296,000)   $19,490,000   $71,744,736   $118,153,817
                                 ============   ===========   ============   ===========    ===========   ===========   ============

                                      -41-

                                   SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                              DONEGAL GROUP INC.

Date:  March 28, 2001                         By: /s/ Donald H. Nikolaus
                                                  ------------------------------
                                                  Donald H. Nikolaus, President

          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.

         Signature                                      Title                               Date
         ---------                                      -----                               ----

s/Donald H. Nikolaus
- ------------------------------------          President and a Director                    March 28, 2001
Donald H. Nikolaus                            (principal executive officer)

s/Ralph G. Spontak
- ------------------------------------          Senior Vice President, Chief Financial      March 28, 2001
Ralph G. Spontak                              Officer and Secretary (principal
                                              financial and accounting officer)

s/Robert S. Bolinger
- ---------------------------                   Director                                    March 28, 2001
Robert S. Bolinger

- ------------------------------------          Director                                    March   , 2001
Thomas J. Finley

s/Patricia A. Gilmartin
- ---------------------------                   Director                                    March 28, 2001
Patricia A. Gilmartin

s/Philip H. Glatfelter
- ---------------------------                   Director                                    March 28, 2001
Philip H. Glatfelter

s/C. Edwin Ireland
- ------------------------------------          Director                                    March 28, 2001
C. Edwin Ireland

- ------------------------------------          Director                                    March   , 2001
R. Richard Sherbahn

                                      -42-

                                  EXHIBIT INDEX
                    (Pursuant to Item 601 of Regulation S-K)

      Exhibit No.                                   Description of Exhibits                                      Reference
      -----------                                   -----------------------                                      ---------
                                                                                                         
        (3)(i)           Certificate of Incorporation of Registrant, as amended                                     (m)
        (3)(ii)          Amended and Restated By-laws of Registrant                                                 (a)

Management Contracts and Compensatory Plans or Arrangements
- -----------------------------------------------------------
                                                                                                         
        (10)(A)          Donegal Group Inc. Agency Stock Purchase Plan                                              (k)
        (10)(B)          Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan                         (d)
        (10)(C)          Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for
                         Directors                                                                                  (j)
        (10)(D)          Donegal Group Inc. Executive Restoration Plan                                              (c)
        (10)(E)          Donegal Mutual Insurance Company 401(k) Plan                                               (m)
        (10)(F)          Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company
                         401(k) Plan                                                                                (m)
        (10)(G)          Donegal Group Inc. 2001 Equity Incentive Plan for Employees                           Filed herewith
        (10)(H)          Donegal Group Inc. 2001 Equity Incentive Plan for Directors                           Filed herewith
        (10)(I)          Donegal Group Inc. 2001 Employee Stock Purchase Plan                                  Filed herewith
        (10)(J)          Donegal Group Inc. 2001 Agency Stock Purchase Plan                                    Filed herewith

Other Material Contracts
- ------------------------
                                                                                                         
        (10)(K)          Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and
                         Atlantic States Insurance Company                                                          (b)
        (10)(L)          Services Allocation Agreement dated September 29, 1986 between Donegal Mutual
                         Insurance Company, Donegal Group, Inc. and Atlantic States Insurance Company               (b)
        (10)(M)          Proportional Reinsurance Agreement dated September 29, 1986 between Donegal
                         Mutual Insurance Company and Atlantic States Insurance Company                             (b)
        (10)(N)          Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between
                         Donegal Mutual Insurance Company and Atlantic States Insurance Company                     (e)

                                      -43-

      Exhibit No.                                   Description of Exhibits                                      Reference
      -----------                                   -----------------------                                      ---------
                                                                                                         
        (10)(O)          Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993
                         between Donegal Mutual Insurance Company, Southern Insurance Company of
                         Virginia, Atlantic States Insurance Company and Pioneer Mutual Insurance
                         Company, and Christiana General Insurance Corporation of New York, Cologne
                         Reinsurance Company of America, Continental Casualty Company, Employers
                         Reinsurance Corporation and Munich American Reinsurance Company                            (g)
        (10)(P)          Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between
                         Donegal Mutual Insurance Company and Atlantic States Insurance Company                     (f)
        (10)(Q)          Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement
                         between Donegal Mutual Insurance Company and Atlantic States Insurance Company             (h)
        (10)(R)          Stock Purchase Agreement dated as of December 21, 1995 between Donegal Mutual
                         Insurance Company and Donegal Group Inc.                                                   (h)
        (10)(S)          Donegal Group Inc. 1996 Employee Stock Purchase Plan                                       (i)
        (10)(T)          Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
                         Mutual Insurance Company and Pioneer Insurance Company                                     (c)
        (10)(U)          Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
                         Mutual Insurance Company and Delaware American Insurance Company                           (c)
        (10)(V)          Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
                         Mutual Insurance Company and Southern Insurance Company of Virginia                        (c)
        (10)(W)          Reinsurance and Retrocession Agreement effective January 1, 2000 between
                         Donegal Mutual Insurance Company and Southern Heritage Insurance Company                   (m)
        (10)(X)          Property Catastrophe Excess of Loss Reinsurance Agreement effective
                         January 1, 2000 between Donegal Mutual Insurance Company and Southern Heritage
                         Insurance Company                                                                          (m)
        (10)(Y)          Stock Purchase Agreement dated as of May 14, 1998 between Donegal Group Inc.
                         and Southern Heritage Limited Partnership                                                  (l)
        (10)(Z)          Amendment dated November 17, 1998 to Stock Purchase Agreement dated as of
                         May 14, 1998 between Donegal Group Inc. and Southern Heritage Limited
                         Partnership                                                                                (l)

                                      -44-

      Exhibit No.                                   Description of Exhibits                                      Reference
      -----------                                   -----------------------                                      ---------
                                                                                                         
       (10)(AA)          Amended and Restated Credit Agreement dated as of July 27, 1998 among Donegal
                         Group Inc., the banks and other financial institutions from time to time
                         party thereto and Fleet National Bank, as Agent                                            (l)
       (10)(BB)          First Amendment and Waiver to the Amended and Restated Credit Agreement dated
                         as of December 31, 1999                                                                    (m)
       (10)(CC)          Stock Purchase Agreement dated as of July 20, 2000 between Donegal Mutual
                         Insurance Company and Donegal Group Inc.                                              Filed herewith
       (10)(DD)          Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement
                         between Donegal Mutual Insurance Company and Atlantic States Insurance Company             (n)
       (10)(EE)          Lease Agreement dated as of September 1, 2000 between Donegal Mutual
                         Insurance Company and Province Bank FSB.                                              Filed herewith
       (10)(FF)          Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001
                         between Donegal Mutual Insurance Company and Pioneer Insurance Company                Filed herewith
         (13)            2000 Annual Report to Stockholders (electronic filing contains only those
                         portions incorporated by reference into this Form 10-K Report)                        Filed herewith
         (20)            Proxy Statement relating to the Annual Meeting of
                         Stockholders to be held on April 19, 2001, provided,
                         however, that the Report of the Compensation Committee,
                         the Performance Graph and the Report of the Audit
                         Committee shall not be deemed filed as part of this Form
                         10-K Report                                                                                (o)
         (21)            Subsidiaries of Registrant                                                            Filed herewith
         (23)            Consent of Independent Auditors                                                       Filed herewith

- ------------------

(a)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-Q Report for the quarter ended
     September 30, 1998.

(b)  Such exhibit is hereby incorporated by reference to the like-described
     exhibits in Registrant's Form S-1 Registration Statement No. 33-8533
     declared effective October 29, 1986.

(c)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1996.

                                      -45-

(d)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1998.

(e)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1988.

(f)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1992.

(g)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
     declared effective September 29, 1993.

(h)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated December 21, 1995.

(i)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-8 Registration Statement No. 333-1287 filed
     February 29, 1996.

(j)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1997.

(k)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
     declared effective August 1, 1996.

(l)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated November 17, 1998.

(m)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1999.

(n)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated June 19, 2000.

(o)  Such exhibit is hereby incorporated by reference to the Registrant's
     definitive proxy statement filed March 29, 2001.

                                      -46-

                              DONEGAL GROUP INC.

                   2001 EQUITY INCENTIVE PLAN FOR EMPLOYEES
                   ----------------------------------------

      1. PURPOSE. The purpose of the Donegal Group Inc. 2001 Equity Incentive
Plan (the "Plan") is to further the growth, development and financial success of
Donegal Group Inc. (the "Company"), its parent and the subsidiaries of the
Company and its parent by providing additional incentives to those officers and
key employees who are responsible for the management of the business and affairs
of the Company, its parent and/or subsidiaries of the Company or its parent,
which will enable those officers and key employees to participate directly in
the growth of the capital stock of the Company. The Company intends that the
Plan will facilitate securing, retaining and motivating management employees of
high caliber and potential. To accomplish these purposes, the Plan provides a
means whereby management employees may receive stock options ("Options") to
purchase shares of the Company's Class A Common Stock, $.01 par value (the
"Class A Common Stock").

      2.  ADMINISTRATION.

      (A) COMPOSITION OF THE COMMITTEE. The Plan shall be administered by a
committee (the "Committee"), which shall be appointed by, and serve at the
pleasure of, the Company's Board of Directors (the "Board"). The Committee shall
be comprised of two or more members of the Board, each of whom shall be a
"non-employee director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act"). In addition, each member of the
Committee shall be an "outside director" within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the
foregoing, from time to time the Board may increase or decrease the size of the
Committee, appoint additional members thereof, remove members (with or without
cause), appoint new members, fill vacancies or remove all members of the
Committee and thereafter directly administer the Plan.

      (B) AUTHORITY OF THE COMMITTEE. The Committee shall have full and final
authority, in its sole discretion, to interpret the provisions of the Plan and
to decide all questions of fact arising in its application; to determine the
employees to whom Options shall be granted and the type, amount, size and terms
of each such grant; to determine the time when Options shall be granted; and to
make all other determinations necessary or advisable for the administration of
the Plan. All decisions, determinations and interpretations of the Committee
shall be final and binding on all optionees and all other holders of Options
granted under the Plan.

      (C) AUTHORITY OF THE BOARD. Notwithstanding anything to the contrary set
forth in the Plan, all authority granted hereunder to the Committee may be
exercised at any time and from time to time by the Board at its election. All
decisions, determinations and interpretations of the Board shall be final and
binding on all optionees and all other holders of Options granted under the
Plan.

      3. STOCK SUBJECT TO THE PLAN. Subject to Section 16 hereof, the shares
that may be issued under the Plan shall not exceed in the aggregate 1,500,000
shares of Class A Common Stock. Such shares may be authorized and unissued
shares or shares issued and subsequently reacquired by the Company. Except as
otherwise provided herein, any shares subject to an

Option that for any reason expires or is terminated unexercised as to such
shares shall again be available under the Plan.

      4. ELIGIBILITY TO RECEIVE OPTIONS. Persons eligible to receive Options
under the Plan shall be limited to those officers and other key employees of the
Company, its parent and any subsidiary of the Company or its parent (as defined
in Section 425 of the Code or any amendment or substitute thereto) who are in
positions in which their decisions, actions and counsel significantly impact
upon the profitability and success of the Company, its parent or any subsidiary
of the Company or its parent. Directors of the Company who are not also officers
or employees of the Company, its parent or any subsidiary of the Company or its
parent shall not be eligible to participate in the Plan. Notwithstanding
anything to the contrary set forth in the Plan, the maximum number of shares of
Class A Common Stock for which Options may be granted to any employee in any
calendar year shall be 100,000 shares.

      5. TYPES OF OPTIONS. Grants may be made at any time and from time to time
by the Committee in the form of stock options to purchase shares of Class A
Common Stock. Options granted hereunder may be Options that are intended to
qualify as incentive stock options within the meaning of Section 422 of the Code
or any amendment or substitute thereto ("Incentive Stock Options") or Options
that are not intended to so qualify ("Nonqualified Stock Options").

      6. OPTION AGREEMENTS. Options for the purchase of Class A Common Stock
shall be evidenced by written agreements in such form not inconsistent with the
Plan as the Committee shall approve from time to time. The Options granted
hereunder may be evidenced by a single agreement or by multiple agreements, as
determined by the Committee in its sole discretion. Each option agreement shall
contain in substance the following terms and conditions:

      (A) TYPE OF OPTION. Each option agreement shall identify the Options
represented thereby either as Incentive Stock Options or Nonqualified Stock
Options, as the case may be.

      (B) OPTION PRICE. Each option agreement shall set forth the purchase price
of the Class A Common Stock purchasable upon the exercise of the Option
evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii) of
the Plan, the purchase price of the Class A Common Stock subject to an Incentive
Stock Option shall be not less than 100% of the fair market value of such stock
on the date the Option is granted, as determined by the Committee, but in no
event less than the par value of such stock. The purchase price of the Class A
Common Stock subject to a Nonqualified Stock Option shall be not less than 100%
of the fair market value of such stock on the date the Option is granted, as
determined by the Committee, but in no event less than the par value of such
stock. For this purpose, fair market value on any date shall mean the closing
price of the Class A Common Stock, as reported in The Wall Street Journal, or if
not so reported, as otherwise reported by the Nasdaq Stock Market ("Nasdaq"),
or if the Class A Common Stock is not reported by Nasdaq, the fair market value
shall be as determined by the Committee pursuant to Section 422 of the Code.

      (C) EXERCISE TERM. Each option agreement shall state the period or periods
of time within which the Option may be exercised, in whole or in part, as
determined by the Committee, provided that no Option shall be exercisable after
ten years from the date of grant thereof. The Committee shall have the power to
permit an acceleration of previously established exercise terms, subject to the
requirements set forth herein, upon such circumstances and subject to such terms
and conditions as the Committee deems appropriate.

                                      -2-

      (D) INCENTIVE STOCK OPTIONS. In the case of an Incentive Stock Option,
each option agreement shall contain such other terms, conditions and provisions
as the Committee determines to be necessary or desirable in order to qualify
such Option as a tax-favored Option (within the meaning of Section 422 of the
Code or any amendment or substitute thereto or regulation thereunder) including
without limitation, each of the following, except that any of these provisions
may be omitted or modified if it is no longer required in order to have an
Option qualify as a tax-favored Option within the meaning of Section 422 of the
Code or any substitute therefor:

          (i) The aggregate fair market value (determined as of the date the
Option is granted) of the Class A Common Stock with respect to which Incentive
Stock Options are first exercisable by any employee during any calendar year
(under all plans of the Company) shall not exceed $100,000.

          (ii) No Incentive Stock Options shall be granted to any employee if
at the time the Option is granted to the individual who owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or its subsidiaries unless at the time such Option is granted the Option
price is at least 110% of the fair market value of the stock subject to the
Option and, by its terms, the Option is not exercisable after the expiration of
five years from the date of grant.

          (iii) No Incentive Stock Options shall be exercisable more than
three months (or one year, in the case of an employee who dies or becomes
disabled within the meaning of Section 72(m)(7) of the Code or any substitute
therefor) after termination of employment.

      (E) SUBSTITUTION OF OPTIONS. Options may be granted under the Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become, and who do concurrently with the grant of
such options become, employees of the Company, its parent or a subsidiary of the
Company or its parent as a result of a merger or consolidation of the employing
corporation with the Company, its parent or a subsidiary of the Company or its
parent, or the acquisition by the Company, its parent or a subsidiary of the
Company or its parent of the assets or capital stock of the employing
corporation. The terms and conditions of the substitute options so granted may
vary from the terms and conditions set forth in this Section 6 to such extent as
the Committee at the time of grant may deem appropriate to conform, in whole or
in part, to the provisions of the stock options in substitution for which they
are granted.

      7. DATE OF GRANT. The date on which an Option shall be deemed to have been
granted under the Plan shall be the date of the Committee's authorization of the
Option or such later date as may be determined by the Committee at the time the
Option is authorized. Notice of the determination shall be given to each
individual to whom an Option is so granted within a reasonable time after the
date of such grant.

      8. EXERCISE AND PAYMENT FOR SHARES. Options may be exercised in whole or
in part, from time to time, by giving written notice of exercise to the
Secretary of the Company, specifying the number of shares to be purchased. The
purchase price of the shares with respect to which an Option is exercised shall
be payable in full with the notice of exercise in cash, Class A Common Stock at
fair market value, Class B Common Stock at fair market value, or a

                                      -3-

combination thereof, as the Committee may determine from time to time and
subject to such terms and conditions as may be prescribed by the Committee for
such purpose. The Committee may also, in its discretion and subject to prior
notification to the Company by an optionee, permit an optionee to enter into an
agreement with the Company's transfer agent or a brokerage firm of national
standing whereby the optionee will simultaneously exercise the Option and sell
the shares acquired thereby through the Company's transfer agent or such a
brokerage firm and either the Company's transfer agent or the brokerage firm
executing the sale will remit to the Company from the proceeds of sale the
exercise price of the shares as to which the Option has been exercised.

      9. RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee
ceases to be an employee of the Company, its parent or any subsidiary of the
Company or its parent for any reason other than death, retirement, as
hereinafter defined, or disability (within the meaning of Section 72(m)(7) of
the Code or any substitute therefor), the optionee shall have the right to
exercise the Option during its term within a period of three months after such
termination to the extent that the Option was exercisable at the time of
termination, or within such other period, and subject to such terms and
conditions, as may be specified by the Committee. In the event that an optionee
dies, retires or becomes disabled prior to the expiration of his Option and
without having fully exercised his Option, the optionee or the optionee's
successor shall have the right to exercise the Option during its term within a
period of one year after termination of employment due to death, retirement or
disability to the extent that the Option was exercisable at the time of
termination, or within such other period, and subject to such terms and
conditions, as may be specified by the Committee. As used in this Section 9,
"retirement" means a termination of employment by reason of an optionee's
retirement at or after the optionee's earliest permissible retirement date
pursuant to and in accordance with his employer's regular retirement plan or
personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof,
if the term of an Incentive Stock Option continues for more than three months
after termination of employment due to retirement or more than one year after
termination of employment due to death or disability, such Option shall
thereupon lose its status as an Incentive Stock Option and shall be treated as a
Nonqualified Stock Option.

      10. GENERAL RESTRICTIONS. Each Option granted under the Plan shall be
subject to the requirement that, if at any time the Committee shall determine
that (i) the listing, registration or qualification of the shares of Class A
Common Stock subject or related thereto upon any securities exchange or under
any state or federal law, or (ii) the consent or approval of any government
regulatory body, or (iii) the satisfaction of any tax payment or withholding
obligation, or (iv) an agreement by the recipient of an Option with respect to
the disposition of shares of Class A Common Stock, is necessary or desirable as
a condition of or in connection with the granting of such Option or the issuance
or purchase of shares of Class A Common Stock thereunder, such Option shall not
be consummated in whole or in part unless such listing, registration,
qualification, consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Committee.

      11. RIGHTS OF A STOCKHOLDER. The recipient of any Option under the Plan,
unless otherwise provided by the Plan, shall have no rights as a stockholder
unless and until certificates for shares of Class A Common Stock are issued and
delivered to him.

      12. RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in the Plan or in any
option agreement entered into pursuant to the Plan shall confer upon any
optionee the right to

                                      -4-

continue in the employment of the Company, its parent or any subsidiary of the
Company or its parent or affect any right that the Company, its parent or any
subsidiary of the Company or its parent may have to terminate the employment of
such optionee.

      13. WITHHOLDING. Whenever the Company proposes or is required to issue or
transfer shares of Class A Common Stock under the Plan, the Company shall have
the right to require the recipient to remit to the Company an amount sufficient
to satisfy any federal, state or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares. If and to the
extent authorized by the Committee, in its sole discretion, an optionee may make
an election, by means of a form of election to be prescribed by the Committee,
to have shares of Class A Common Stock that are acquired upon exercise of an
Option withheld by the Company or to tender other shares of Class A Common Stock
or other securities of the Company owned by the optionee to the Company at the
time of exercise of an Option to pay the amount of tax that would otherwise be
required by law to be withheld by the Company as a result of any exercise of an
Option. Any such election shall be irrevocable and shall be subject to
termination by the Committee, in its sole discretion, at any time. Any
securities so withheld or tendered will be valued by the Committee as of the
date of exercise.

      14. NON-ASSIGNABILITY. No Option under the Plan shall be assignable or
transferable by the recipient thereof except by will or by the laws of descent
and distribution or by such other means as the Committee may approve. During the
life of the recipient, such Option shall be exercisable only by such person or
by such person's guardian or legal representative.

      15. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the
Plan (including without limitation determinations of the persons to receive
Options, the form, amount and timing of such grants, the terms and provisions of
Options, and the agreements evidencing same) need not be uniform and may be made
selectively among persons who receive, or are eligible to receive, grants of
Options under the Plan whether or not such persons are similarly situated.

      16. ADJUSTMENTS.

      (A) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Class A Common Stock
covered by each outstanding Option and the number of shares of Class A Common
Stock that have been authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per share of Class
A Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Class A
Common Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Class A Common Stock, or any other
increase or decrease in the number of issued shares of Class A Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Class A Common Stock
subject to an Option.

                                      -5-

      (B) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, all outstanding Options will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Committee. The Committee may, in the exercise of its discretion
in such instances, declare that any Option shall terminate as of a date fixed by
the Committee and give each Option holder the right to exercise his Option as to
all or any part of the shares of Class A Common Stock covered by the Option,
including shares as to which the Option would not otherwise be exercisable.

      (C) SALE OR MERGER. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Committee, in the exercise of its sole
discretion, may take such action as it deems desirable, including, but not
limited to: (i) causing an Option to be assumed or an equivalent option to be
substituted by the successor corporation or a parent or subsidiary of such
successor corporation, (ii) providing that each Option holder shall have the
right to exercise his Option as to all of the shares of Class A Common Stock
covered by the Option, including shares as to which the Option would not
otherwise be exercisable, or (iii) declaring that an Option shall terminate at a
date fixed by the Committee provided that the Option holder is given notice and
opportunity to exercise the then exercisable portion of his Option prior to such
date.

      17. AMENDMENT. The Committee may terminate or amend the Plan at any time,
with respect to shares as to which Options have not been granted, subject to any
required stockholder approval or any stockholder approval that the Board may
deem to be advisable for any reason, such as for the purpose of obtaining or
retaining any statutory or regulatory benefits under tax, securities or other
laws or satisfying any applicable stock exchange listing requirements. The
Committee may not, without the consent of the holder of an Option, alter or
impair any Option previously granted under the Plan, except as specifically
authorized herein.

      18. RESERVATION OF SHARES. The Company, during the term of the Plan, will
at all times reserve and keep available such number of shares of Class A Common
Stock as shall be sufficient to satisfy the requirements of the Plan. Inability
of the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any shares hereunder, shall relieve the Company of any
liability for the failure to issue or sell such shares as to which such
requisite authority shall not have been obtained.

      19. EFFECT ON OTHER PLANS. Participation in the Plan shall not affect an
employee's eligibility to participate in any other benefit or incentive plan of
the Company, its parent or any subsidiary of the Company or its parent. Any
Options granted pursuant to the Plan shall not be used in determining the
benefits provided under any other plan of the Company, its parent or any
subsidiary of the Company or its parent unless specifically provided.

      20. DURATION OF THE PLAN. The Plan shall remain in effect until all
Options granted under the Plan have been satisfied by the issuance of shares,
but no Option shall be granted more than ten years after the earlier of the date
the Plan is adopted by the Company or is approved by the Company's stockholders.

      21. FORFEITURE FOR DISHONESTY. Notwithstanding anything to the contrary in
the Plan, if the Committee finds, by a majority vote, after full consideration
of the facts presented on

                                      -6-

behalf of both the Company and any optionee, that the optionee has been engaged
in fraud, embezzlement, theft, commission of a felony or dishonest conduct in
the course of his employment or retention by the Company, its parent or any
subsidiary of the Company or its parent that damaged the Company, its parent or
any subsidiary of the Company or its parent or that the optionee has disclosed
confidential information of the Company, its parent or any subsidiary of the
Company or its parent, the optionee shall forfeit all unexercised Options and
all exercised Options under which the Company has not yet delivered the
certificates. The decision of the Committee in interpreting and applying the
provisions of this Section 21 shall be final. No decision of the Committee,
however, shall affect the finality of the discharge or termination of such
optionee by the Company, its parent or any subsidiary of the Company or its
parent in any manner.

      22. NO PROHIBITION ON CORPORATE ACTION. No provision of the Plan shall be
construed to prevent the Company or any officer or director thereof from taking
any action deemed by the Company or such officer or director to be appropriate
or in the Company's best interest, whether or not such action could have an
adverse effect on the Plan or any Options granted hereunder, and no optionee or
optionee's estate, personal representative or beneficiary shall have any claim
against the Company or any officer or director thereof as a result of the taking
of such action.

      23. INDEMNIFICATION. With respect to the administration of the Plan, the
Company shall indemnify each present and future member of the Committee and the
Board against, and each member of the Committee and the Board shall be entitled
without further action on such member's part to indemnity from the Company for,
all expenses (including the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of litigation, other
than amounts paid to the Company itself) reasonably incurred by him in
connection with or arising out of, any action, suit or proceeding in which he
may be involved by reason of his being or having been a member of the Committee
or the Board, whether or not he continues to be such member at the time of
incurring such expenses; provided, however, that such indemnity shall not
include any expenses incurred by any such member of the Committee or the Board
(i) in respect of matters as to which he shall be finally adjudged in any such
action, suit or proceeding to have been guilty of gross negligence or willful
misconduct in the performance of his duty as such member of the Committee or the
Board; or (ii) in respect of any matter in which any settlement is effected for
an amount in excess of the amount approved by the Company on the advice of its
legal counsel; and provided further that no right of indemnification under the
provisions set forth herein shall be available to or enforceable by any such
member of the Committee or the Board unless, within 60 days after institution of
any such action, suit or proceeding, he shall have offered the Company in
writing the opportunity to handle and defend same at its own expense. The
foregoing right of indemnification shall inure to the benefit of the heirs,
executors or administrators of each such member of the Committee or the Board
and shall be in addition to all other rights to which such member may be
entitled as a matter of law, contract or otherwise.

      24. MISCELLANEOUS PROVISIONS.

      (A) COMPLIANCE WITH PLAN PROVISIONS. No optionee or other person shall
have any right with respect to the Plan, the Class A Common Stock reserved for
issuance under the Plan or in any Option until a written option agreement shall
have been executed by the Company and the

                                      -7-

optionee and all the terms, conditions and provisions of the Plan and the Option
applicable to such optionee (and each person claiming under or through him) have
been met.

      (B) APPROVAL OF COUNSEL. In the discretion of the Committee, no shares of
Class A Common Stock, other securities or property of the Company or other forms
of payment shall be issued hereunder with respect to any Option unless counsel
for the Company shall be satisfied that such issuance will be in compliance with
applicable federal, state, local and foreign legal, securities exchange and
other applicable requirements.

      (C) COMPLIANCE WITH RULE 16B-3. To the extent that Rule 16b-3 under the
Exchange Act applies to the Plan or to Options granted under the Plan, it is the
intention of the Company that the Plan comply in all respects with the
requirements of Rule 16b-3, that any ambiguities or inconsistencies in
construction of the Plan be interpreted to give effect to such intention and
that, if the Plan shall not so comply, whether on the date of adoption or by
reason of any later amendment to or interpretation of Rule 16b-3, the provisions
of the Plan shall be deemed to be automatically amended so as to bring them into
full compliance with such rule.

      (D) EFFECTS OF ACCEPTANCE OF OPTION. By accepting any Option or other
benefit under the Plan, each optionee and each person claiming under or through
him shall be conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board and/or the Committee or its delegates.

      (E) CONSTRUCTION. The masculine pronoun shall include the feminine and
neuter, and the singular shall include the plural, where the context so
indicates.

     25. STOCKHOLDER APPROVAL. The exercise of any Option granted under the Plan
shall be subject to the approval of the Plan by the  stockholders of the Company
in accordance with applicable law and regulations.

      Date of Adoption by Board:  March 8, 2001.

      Date of Approval by Stockholders:  April 19, 2001.

PH1\830125.3
                                      -8-

                               DONEGAL GROUP INC.

                   2001 EQUITY INCENTIVE PLAN FOR DIRECTORS
                   ----------------------------------------

      DONEGAL GROUP INC., a corporation organized under the laws of the State of
Delaware, hereby sets forth the 2001 Equity Incentive Plan for Directors. The
Plan provides for the grant of (i) Options to Outside Directors of the Company
and the Mutual Company and (ii) Restricted Stock Awards to Directors of the
Company and the Mutual Company, as each of such capitalized terms is hereinafter
defined.

      1.   DEFINITIONS.  Whenever  the  following  terms  are used in the Plan
they shall have the  meanings  specified  below  unless  the  context  clearly
indicates to the contrary:

      "Board" shall mean the Board of Directors of the Company.

      "Class A Common Stock" shall mean the Class A Common Stock, $.01 par
value, of the Company.

      "Class B Common Stock" shall mean the Class B Common Stock, $.01 par
value, of the Company.

      "Code" shall mean the Internal Revenue Code of 1986, as amended. Reference
to a specific section of the Code shall include such section, any valid
regulation promulgated thereunder and any comparable provision of any future
legislation amending, supplementing or superseding such section.

      "Company" shall mean Donegal Group Inc., a Delaware corporation.

      "Director" shall mean a member of the Board of Directors of the Company
and/or the Mutual Company.

      "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

      "Fair Market Value" of the Class A Common Stock or Class B Common Stock,
as the case may be, on any date shall mean the closing price of the Class A
Common Stock or Class B Common Stock, as applicable, for such date, as reported
in The Wall Street Journal, or if not so reported, as otherwise reported by The
Nasdaq Stock Market ("Nasdaq"), or if the Class A Common Stock or Class B Common
Stock, as the case may be, is not reported by Nasdaq, the fair market value
shall be as determined by the Board. If no closing price is reported for such
date, the next preceding date for which such sale prices are quoted shall be
used.

      "Grantee" shall mean a Director to whom a Restricted Stock Award is
granted.

      "Mutual Company" shall mean Donegal Mutual Insurance Company.

      "Option" shall mean a nonqualified stock option granted under the
provisions of Section 4 of the Plan to purchase Class A Common Stock of the
Company.

      "Optionee" shall mean an Outside Director to whom an Option is granted.

      "Outside Director" shall mean a Director who is not also an employee of
the Company, the Mutual Company or any affiliate of the Company or the Mutual
Company.

      "Plan" shall mean this 2001 Equity Incentive Plan for Directors.

      "Restricted Stock Award" shall mean a restricted stock award granted under
the provisions of Section 5 of the Plan.

      "Secretary" shall mean the Secretary of the Company.

      "Termination of Service" shall mean such time as a Director shall cease to
serve as a member of the Board of Directors of the Company or the Mutual
Company, whether as a result of resignation, failure to be reelected, removal
for cause, death or any other reason.

      2.   ADMINISTRATION.

      (A)  ADMINISTRATION  BY THE  BOARD.  The Plan shall be  administered  by
the Board.

      (B) DUTY AND POWERS OF THE BOARD. It shall be the duty of the Board to
conduct the general administration of the Plan in accordance with its
provisions. The Board shall have the power to interpret the Plan, the Options
and the Restricted Stock Awards and to adopt rules for the administration,
interpretation and application of the Plan as are consistent therewith and to
interpret, amend or revoke any such rules. The Board shall have the discretion
to determine who will be granted Options and to determine the number of Options
to be granted to any Outside Director, the timing of such grant and the terms of
exercise. The Board shall not have any discretion to determine who will be
granted Restricted Stock Awards under the Plan.

      (C) BOARD ACTIONS. The Board may act either by vote of a majority of its
members present at a meeting of the Board at which a quorum is present or by a
memorandum or other written instrument signed by all members of the Board.

      (D) COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of
the Board shall not receive any compensation for their services in administering
the Plan, but all expenses and liabilities they incur in connection with the
administration of the Plan shall be borne by the Company. The Board may employ
attorneys, consultants, accountants or other persons. The Board, the Company and
the officers and directors of the Company shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Board in good faith shall be
final and binding upon all Optionees and Grantees, the Company and all other
interested persons. No member of the Board shall be personally liable for any
action, determination or interpretation made in good faith with respect to the
Plan, and all members of the Board shall be fully protected and indemnified by
the Company in respect to any such action, determination or interpretation.

      3.   SHARES SUBJECT TO THE PLAN.

      (A) LIMITATIONS. The shares of stock issuable pursuant to Options or
Restricted Stock Awards shall be shares of Class A Common Stock. The total
number of such shares that may be

                                      -2-

issued pursuant to Options or Restricted Stock Awards granted under the Plan
shall not exceed 200,000 in the aggregate.

      (B) EFFECT OF UNEXERCISED OR CANCELLED OPTIONS. If an Option expires or is
cancelled for any reason without having been fully exercised or vested, the
number of shares subject to such Option that were not purchased or did not vest
prior to such expiration or cancellation may again be made subject to an Option
or Restricted Stock Award granted hereunder.

      (C) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Class A Common Stock
covered by each outstanding Option and Restricted Stock Award and the number of
shares of Class A Common Stock that have been authorized for issuance under the
Plan but as to which no Options or Restricted Stock Awards have yet been granted
or which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per share of Class A Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Class A Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Class A Common Stock, or any other increase or decrease
in the number of issued shares of Class A Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Class A Common Stock subject to an Option or
Restricted Stock Award.

      (D) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, all outstanding Options will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. The Board may, in the exercise of its discretion in such
instances, declare that any Option shall terminate as of a date fixed by the
Board and give each Option holder the right to exercise his or her Option as to
all or any part of the shares of Class A Common Stock covered by the Option,
including shares as to which the Option would not otherwise be exercisable.

      (E) SALE OR MERGER. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Board, in the exercise of its sole
discretion, may take such action as it deems desirable, including, but not
limited to: (i) causing an Option to be assumed or an equivalent option to be
substituted by the successor corporation or a parent or subsidiary of such
successor corporation, (ii) providing that each Option holder shall have the
right to exercise his or her Option as to all of the shares of Class A Common
Stock covered by the Option, including shares as to which the Option would not
otherwise be exercisable, or (iii) declaring that an Option shall terminate at a
date fixed by the Board, provided that the Option holder is given notice and
opportunity to exercise the then exercisable portion of his or her Option prior
to such date.

                                      -3-

      4.   STOCK OPTIONS.

      (A)  GRANTING OF OPTIONS.

           (I)   ELIGIBILITY.  Each Outside  Director  shall be eligible to be
granted Options.

           (II) GRANTING OF OPTIONS. Options may be granted by the Board at any
time and from time to time while the Plan shall be in effect. The Board shall
have the authority to determine the Outside Directors to whom Options are
granted, the number of Options to be granted to each and the timing and vesting
of each grant. The Board's determinations with respect to Options granted under
the Plan need not be uniform and may be made selectively among Outside Directors
as the Board, in its discretion, shall determine.

           (III) TYPE OF OPTIONS. All Options granted under the Plan shall be
options not intended to qualify as incentive stock options under Section 422 of
the Code.

      (B)  TERMS OF OPTIONS.

           (I) OPTION AGREEMENT. Each Option shall be evidenced by a written
stock option agreement that shall be executed by the Optionee and on behalf of
the Company and that shall contain such terms and conditions as the Board
determines are required or appropriate under the Plan.

           (II) OPTION PRICE. The exercise price of the shares subject to each
Option shall be not less than 100% of the Fair Market Value for such shares on
the date the Option is granted.

           (III) DATE OF GRANT. The date on which an Option shall be deemed to
have been granted under the Plan shall be the date of the Board's authorization
of the Option or such later date as may be determined by the Board at the time
the Option is authorized.

           (IV) EXERCISE TERM. Each stock option agreement shall state the
period or periods of time within which the Option may be exercised, in whole or
in part, as determined by the Board, provided that no Option shall be
exercisable after ten years from the date of grant thereof. The Board shall have
the power to permit an acceleration of previously established exercise terms,
subject to the requirements set forth herein, upon such circumstances and
subject to such terms and conditions as the Board deems appropriate.

           (V) RIGHTS UPON TERMINATION OF SERVICE. Upon an Optionee's
Termination of Service, for any reason other than death, the Optionee shall have
the right to exercise the Option during its term within a period of three months
after such termination to the extent that the Option was exercisable at the time
of termination, or within such other period, and subject to such terms and
conditions, as may be specified by the Board. In the event that an Optionee dies
prior to the expiration of his or her Option and without having fully exercised
his or her Option, the Optionee's representative or successor shall have the
right to exercise the Option during its term within a period of one year after
Termination of Service due to death to the extent that the Option was
exercisable at the time of Termination of Service, or within such other period,
and subject to such terms and conditions, as may be specified by the Board.

      (C)  EXERCISE OF OPTIONS.

                                      -4-

           (I) PERSON ELIGIBLE TO EXERCISE. During the lifetime of the Optionee,
only the Optionee may exercise an Option or any portion thereof. After the death
of the Optionee, any exercisable portion of an Option may be exercised by the
Optionee's personal representative or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution. The Company may require appropriate proof from any such person of
such person's right to exercise the Option or any portion thereof.

          (II) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares on exercise of an Option.

           (III) MANNER OF EXERCISE. Options may be exercised in whole or in
part, from time to time, by giving written notice of exercise to the Secretary,
specifying the number of shares to be purchased. The purchase price of the
shares with respect to which an Option is exercised shall be payable in full
with the notice of exercise in cash, Class A Common Stock at Fair Market Value,
Class B Common Stock at Fair Market Value, or a combination thereof, as the
Board may determine from time to time and subject to such terms and conditions
as may be prescribed by the Board for such purpose. The Board may also, in its
discretion and subject to prior notification to the Company by an Optionee,
permit an Optionee to enter into an agreement with the Company's transfer agent
or a brokerage firm of national standing whereby the Optionee will
simultaneously exercise the Option and sell the shares acquired thereby through
the Company's transfer agent or such a brokerage firm and either the Company's
transfer agent or the brokerage firm executing the sale will remit to the
Company from the proceeds of sale the exercise price of the shares as to which
the Option has been exercised.

           (IV) RIGHTS OF STOCKHOLDERS. An Optionee shall not be, nor have any
of the rights of, a stockholder of the Company in respect to any shares that may
be purchased upon the exercise of any Option or portion thereof unless and until
certificates representing such shares have been issued by the Company to such
Optionee.

           (V) GENERAL RESTRICTIONS. Each Option granted under the Plan shall be
subject to the requirement that, if at any time the Board shall determine that
(i) the listing, registration or qualification of the shares of Class A Common
Stock subject or related thereto upon any securities exchange or under any state
or federal law, or (ii) the consent or approval of any government regulatory
body, or (iii) the satisfaction of any tax payment or withholding obligation, or
(iv) an agreement by the Optionee with respect to the disposition of shares of
Class A Common Stock, is necessary or desirable as a condition of or in
connection with the granting of such Option or the issuance or purchase of
shares of Class A Common Stock thereunder, such Option shall not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval, payment, withholding or agreement shall have been effected or obtained
free of any conditions not acceptable to the Board.

                                      -5-

     5.   RESTRICTED STOCK AWARDS.

      (A)  GRANTING OF AWARDS.

           (I)   ELIGIBILITY.  Each  Director  shall be eligible to be granted
Restricted Stock Awards.

           (II) GRANTING OF AWARDS. Each Director shall be granted annual
Restricted Stock Awards consisting of 175 shares of Class A Common Stock, such
Restricted Stock Awards to be made on the first business day of January in each
year, commencing January 2, 2002, provided that the Director served as a member
of the Board or of the Board of Directors of the Mutual Company during any
portion of the preceding calendar year.

      (B)  TERMS OF RESTRICTED STOCK AWARDS.

           (I) RESTRICTED STOCK AGREEMENT. Each Restricted Stock Award shall be
evidenced by a written restricted stock agreement that shall be executed by the
Grantee and the Company and that shall contain such restrictions, terms and
conditions as are required by the Plan.

           (II) RESTRICTIONS ON TRANSFER. The shares of Class A Common Stock
comprising the Restricted Stock Awards may not be sold or otherwise transferred
by the Grantee until one year after the date of grant. Although the shares of
Class A Common Stock comprising each Restricted Stock Award shall be registered
in the name of the Grantee, the Company reserves the right to place a
restrictive legend on the stock certificate. None of such shares of Class A
Common Stock shall be subject to forfeiture.

           (III) RIGHTS AS STOCKHOLDER.

                 (A) Subject to the restrictions on transfer set forth in
Section 5(b)(ii) hereof, a Grantee shall have all the rights of a stockholder
with respect to the shares of Class A Common Stock issued pursuant to Restricted
Stock Awards made hereunder, including the right to vote the shares and receive
all dividends and other distributions paid or made with respect to the shares.

                 (B) In the event of changes in the capital stock of the Company
by reason of stock dividends, split-ups or combinations of shares,
reclassifications, mergers, consolidations, reorganizations or liquidations
while the shares comprising a Restricted Stock Award shall be subject to
restrictions on transfer, any and all new, substituted or additional securities
to which the Grantee shall be entitled by reason of the ownership of a
Restricted Stock Award shall be subject immediately to the terms, conditions and
restrictions of the Plan.

                 (C) If a Grantee receives rights or warrants with respect to
any shares comprising a Restricted Stock Award, such rights or warrants or any
shares or other securities acquired by the exercise of such rights or warrants
may be held, exercised, sold or otherwise disposed of by the Grantee free and
clear of the restrictions and obligations set forth in the Plan.

           (IV) GENERAL RESTRICTIONS. Each Restricted Stock Award granted under
the Plan shall be subject to the requirement that if, at any time the Board
shall determine that (i) the

                                      -6-

listing, registration or qualification of the shares of Class A Common Stock
subject or related thereto upon any securities exchange or under any state or
federal law, or (ii) the consent or approval of any government regulatory body,
or (iii) the satisfaction of any tax payment or withholding obligation, or (iv)
an agreement by the Grantee with respect to the disposition of shares of Class A
Common Stock, is necessary or desirable as a condition of or in connection with
the granting of such Restricted Stock Award, such Restricted Stock Award shall
not be consummated in whole or in part unless such listing, registration,
qualification, consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Board.

      6.   MISCELLANEOUS PROVISIONS.

      (A) NO ASSIGNMENT OR TRANSFER. No Option or interest or right therein or
part thereof, and, for a period of one year after the date of grant, no
Restricted Stock Award or any interest therein or part thereof, shall be liable
for the debts, contracts, or engagements of the Optionee or Grantee or his or
her successors in interest nor shall they be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means,
whether such disposition is voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that nothing in this
Section 6(a) shall prevent transfers by will or by the applicable laws of
descent and distribution.

      (B) AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board, subject to any required stockholder
approval or any stockholder approval that the Board may deem advisable for any
reason, such as for the purpose of obtaining or retaining any statutory or
regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange listing requirements. Neither the amendment,
suspension nor termination of the Plan shall, without the consent of the
Optionee or Grantee, alter or impair any rights or obligations under any
outstanding Option or Restricted Stock Award. No Option or Restricted Stock
Award may be granted during any period of suspension nor after termination of
the Plan.

      (C) WITHHOLDING. Whenever the Company proposes or is required to issue or
transfer shares of Common Stock under the Plan, the Company shall have the right
to require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state or local withholding tax requirements prior to the delivery
of any certificate for such shares. If and to the extent authorized by the
Board, in its sole discretion, an Optionee may make an election, by means of a
form of election to be prescribed by the Board, to have shares of Class A Common
Stock that are acquired upon exercise of an Option withheld by the Company or to
tender other shares of Class A Common Stock or other securities of the Company
owned by the Optionee to the Company at the time of exercise of an Option to pay
the amount of tax that would otherwise be required by law to be withheld by the
Company as a result of any exercise of an Option. Any such election shall be
irrevocable and shall be subject to termination by the Board, in its sole
discretion, at any time. Any securities so withheld or tendered will be valued
by the Board as of the date of exercise.

                                      -7-

      (D) RESERVATION OF SHARES. The Company, during the term of the Plan, will
at all times reserve and keep available such number of shares of Class A Common
Stock as shall be sufficient to satisfy the requirements of the Plan. Inability
of the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any shares hereunder, shall relieve the Company of any
liability for the failure to issue or sell such shares as to which such
requisite authority shall not have been obtained.

      (E) DURATION OF THE PLAN. The Plan shall remain in effect until all
Options granted under the Plan have been satisfied by the issuance of shares,
but no Option or Restricted Stock Award shall be granted more than ten years
after the earlier of the date the Plan is adopted by the Company or is approved
by the Company's stockholders.

      (F) NO PROHIBITION ON CORPORATE ACTION. No provision of the Plan shall be
construed to prevent the Company or any officer or director thereof from taking
any action deemed by the Company or such officer or director to be appropriate
or in the Company's best interest, whether or not such action could have an
adverse effect on the Plan or any Options or Restricted Stock Awards granted
hereunder, and no Director or Director's estate, personal representative or
beneficiary shall have any claim against the Company or any officer or director
thereof as a result of the taking of such action.

      (G) INDEMNIFICATION. With respect to the administration of the Plan, the
Company shall indemnify each present and future member of the Board against, and
each member of the Board shall be entitled without further action on such Board
member's part to indemnity from the Company for, all expenses (including the
amount of judgments and the amount of approved settlements made with a view to
the curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by such Board member in connection with or arising
out of, any action, suit or proceeding in which such Board member may be
involved by reason of his or her being or having been a member of the Board,
whether or not he or she continues to be such member at the time of incurring
such expenses; provided, however, that such indemnity shall not include any
expenses incurred by any such Board member (i) in respect of matters as to which
such Board member shall be finally adjudged in any such action, suit or
proceeding to have been guilty of gross negligence or willful misconduct in the
performance of his or her duty as such member of the Board; or (ii) in respect
of any matter in which any settlement is effected for an amount in excess of the
amount approved by the Company on the advice of its legal counsel; and provided
further that no right of indemnification under the provisions set forth herein
shall be available to or enforceable by any such Board member unless, within 60
days after institution of any such action, suit or proceeding, such Board member
shall have offered the Company in writing the opportunity to handle and defend
same at its own expense. The foregoing right of indemnification shall inure to
the benefit of the heirs, executors or administrators of each such member of the
Board and shall be in addition to all other rights to which such member may be
entitled as a matter of law, contract or otherwise.

      (H) COMPLIANCE WITH PLAN PROVISIONS. No Optionee or Grantee shall have any
right with respect to the Plan, the Class A Common Stock reserved for issuance
under the Plan or in any Option or Restricted Stock Award until a written stock
option agreement or a written restricted stock agreement, as the case may be,
shall have been executed on behalf of the Company and by the Optionee or
Grantee, and all the terms, conditions and provisions of the

                                      -8-

Plan and the Option or Restricted Stock Award applicable to such Optionee or
Grantee (and each person claiming under or through such person) have been met.

      (I) APPROVAL OF COUNSEL. In the discretion of the Board, no shares of
Class A Common Stock, other securities or property of the Company or other forms
of payment shall be issued hereunder with respect to any Option or Restricted
Stock Award unless counsel for the Company shall be satisfied that such issuance
will be in compliance with applicable federal, state, local and foreign legal,
securities exchange and other applicable requirements.

      (J) EFFECTS OF ACCEPTANCE. By accepting any Option or Restricted Stock
Award or other benefit under the Plan, each Optionee and Grantee and each person
claiming under or through such person shall be conclusively deemed to have
indicated his or her acceptance and ratification of, and consent to, any action
taken under the Plan by the Company, the Board or its delegates.

      (K) COMPLIANCE WITH RULE 16B-3. To the extent that Rule 16b-3 under the
Exchange Act applies to Options or Restricted Stock Awards granted under the
Plan, it is the intention of the Company that the Plan comply in all respects
with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in
construction of the Plan be interpreted to give effect to such intention and
that if the Plan shall not so comply, whether on the date of adoption or by
reason of any later amendment to or interpretation of Rule 16b-3, the provisions
of the Plan shall be deemed to be automatically amended so as to bring them into
full compliance with that rule.

      (L) STOCKHOLDER APPROVAL. No Option may be exercised and no Restricted
Stock Award may be granted until the Plan shall have been approved by the
stockholders of the Company in accordance with applicable law and regulations.

      (M)  TITLES.  Titles are provided  herein for  convenience  only and are
not to serve as a basis for interpretation or construction of the Plan.

Adopted by the Board of Directors on March 8, 2001.

Approved by the Stockholders on April 19, 2001.

PH1\830096.3
                                      -9-

                               DONEGAL GROUP INC.

                        2001 EMPLOYEE STOCK PURCHASE PLAN
                        ---------------------------------

                         As Adopted as of March 8, 2001

SECTION 1.  PURPOSE.

      The Donegal Group Inc. 2001 Employee Stock Purchase Plan has been
established by Donegal Group Inc. (the "Company") for the benefit of the
eligible employees of the Company, its parent, Donegal Mutual Insurance Company
(the "Mutual Company"), and participating subsidiaries of the Company and of the
Mutual Company. The purpose of this Plan is to provide each eligible employee
with an opportunity to acquire or increase his or her proprietary interest in
the Company through the purchase of shares of the Company's Class A Common Stock
(the "Class A Common Stock") at a discount from current market prices. This Plan
is intended to meet the requirements of Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code").

SECTION 2.  ELIGIBLE EMPLOYEES.

      (a) Employees eligible to participate in this Plan ("Eligible Employees")
shall consist of all individuals: (i) who are full-time employees (as defined in
Section 2(b) of this Plan) of the Company, the Mutual Company or any subsidiary
(as defined in Section 425 of the Code) of the Company or the Mutual Company (a
"Participating Subsidiary"), and (ii) who have completed one month of employment
on or prior to the date on which an Enrollment Period (as hereinafter defined)
begins.

      (b) A "full-time employee" is an employee of the Company, the Mutual
Company or any Participating Subsidiary who works or is scheduled to work at
least 1,000 hours during any calendar year. An employee who is not scheduled to
work at least 1,000 hours during a calendar year, but who in fact works at least
1,000 hours during a calendar year, shall be considered a "full-time employee"
once the employee is credited with at least 1,000 hours during such year.

      (c) A person who is otherwise an Eligible Employee shall not be granted
any right to purchase shares of the Class A Common Stock under this Plan to the
extent that: (i) based on such person's ownership of the Class A Common Stock at
the time the right is granted, such right, if exercised, would cause the person
to own shares of the Class A Common Stock (including shares that would be owned
if all outstanding options to purchase Common Stock held by such person were
exercised) that possess 5% or more of the total combined voting power or value
of all classes of stock of the Company, or any subsidiary of the Company or the
Mutual Company, or (ii) such right would cause such person to have purchase
rights under this Plan and all other stock purchase plans of the Company, or any
subsidiary of the Company or the Mutual Company that meet the requirements of
Section 423 of the Code, that accrue at a rate that exceeds $25,000 of fair
market value of the stock of the Company, or any subsidiary of the

Company or the Mutual Company (determined at the time the right to purchase
Class A Common Stock under this Plan is granted), for each calendar year in
which such right is outstanding. For this purpose, a right to purchase Class A
Common Stock accrues when such right first becomes exercisable during the
calendar year (but the rate of accrual for any calendar year may in no event
exceed $25,000 of the fair market value of the Class A Common Stock subject to
the right), and the number of shares of Class A Common Stock under one right may
not be carried over to any other right.

      (d) Notwithstanding anything to the contrary set forth in this Plan,
officers of the Company, the Mutual Company or any Participating Subsidiary who
are subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange
Act") with respect to their ownership of shares of the Class A Common Stock
("Section 16 Officers") shall be subject to the restrictions and conditions set
forth in Sections 7(b) and 9 of this Plan.

SECTION 3.  DURATION OF PLAN AND SUBSCRIPTION PERIODS.

      This Plan shall be in effect from July 1, 2001 through and including June
30, 2011. During the term of this Plan, there shall be 20 semi-annual
"Subscription Periods." Each Subscription Period shall extend from July 1
through December 31 or from January 1 through June 30, respectively, with the
first Subscription Period beginning on July 1, 2001 and the last Subscription
Period ending on June 30, 2011.

SECTION 4.  ENROLLMENT AND ENROLLMENT PERIOD.

      Each individual who is enrolled in the Company's 1996 Employee Stock
Purchase Plan and who is an Eligible Employee as of June 30, 2001 shall be
deemed to be enrolled automatically in this Plan effective as of the first
Subscription Period. Thereafter, enrollment for participation in this Plan shall
take place during the "Enrollment Period" preceding each Subscription Period,
which shall be either the period from the 1st through the 30th day of June or
the period from the 1st through the 31st day of December of each year. Except as
provided above regarding enrollment in this Plan as of the first Subscription
Period, any person who is an Eligible Employee and who desires to subscribe for
the purchase of Common Stock must file a subscription agreement during an
Enrollment Period, and such employee's participation in this Plan shall commence
at the outset of the next Subscription Period. Once enrolled, an Eligible
Employee shall continue to participate in this Plan for each succeeding
Subscription Period until such Eligible Employee terminates his or her
participation or ceases to be an Eligible Employee. An Eligible Employee who
desires to change his or her rate of contribution may do so effective as of the
beginning of the next Subscription Period by submitting a properly completed and
executed enrollment form during the Enrollment Period for the next Subscription
Period. An Eligible Employee who is not a Section 16 Officer may also change his
or her rate of contribution during a Subscription Period only pursuant to
Section 7(b) of this Plan.

SECTION 5.  NUMBER OF SHARES TO BE OFFERED.

      The total number of shares to be made available under this Plan is 300,000
shares of the Class A Common Stock. Such Class A Common Stock may be authorized
and unissued shares or shares issued and thereafter acquired by the Company. In
the event the total number of shares

                                       2

available for purchase under this Plan are purchased prior to the expiration of
this Plan, this Plan may be terminated in accordance with Section 13 of this
Plan.

SECTION 6.  SUBSCRIPTION PRICE.

      The "Subscription Price" for each share of Class A Common Stock subscribed
for under this Plan during each Subscription Period shall be the lesser of 85%
of the fair market value of such share as determined as of the last trading day
before the first day of the Enrollment Period with respect to such Subscription
Period or 85% of the fair market value of such share as determined on the last
trading day of such Subscription Period. The fair market value of a share shall
be the closing price reported by the Nasdaq Stock Market on the applicable date;
provided, however, that the Subscription Price shall never be less than the par
value per share of the Class A Common Stock.

SECTION 7.  AMOUNT OF CONTRIBUTION AND METHOD OF PAYMENT.

      (a) The Subscription Price shall be payable by the Eligible Employee by
means of payroll deduction. The maximum payroll deduction shall be no more than
10% of an Eligible Employee's Base Pay (as hereinafter defined). An Eligible
Employee must authorize a minimum payroll deduction, based on such employee's
rate of Base Pay at the time of such authorization, that will enable such
employee to accumulate by the end of the Subscription Period an amount
sufficient to purchase at least ten shares of Class A Common Stock. An Eligible
Employee may not make separate cash deposits toward the payment of the
Subscription Price.

      (b) An Eligible Employee who is not a Section 16 Officer may at any time
during a Subscription Period reduce the amount previously authorized to be
deducted from his or her Base Pay, provided the reduction conforms with the
minimum payroll deduction set forth in Section 7(a) of this Plan, by forwarding
to the Company a properly completed and executed written notice setting forth
the reduction in his or her payroll deduction. The change shall become effective
on a prospective basis as soon as practicable after receipt by the Company of
the change notice. A payroll deduction may be changed under this Section 7(b),
by forwarding to the Company a properly completed and executed written notice
setting forth the reduction in his or her payroll deduction only once during any
Subscription Period and shall remain in effect for subsequent Subscription
Periods, subject to compliance with Section 7(a) of this Plan, until such
Eligible Employee terminates his or her participation or ceases to be an
Eligible Employee. A Section 16 Officer may not change his or her rate of
contribution during a Subscription Period.

      (c) "Base Pay" means the straight-time earnings or regular salary paid to
an Eligible Employee. Base Pay shall not include overtime, bonuses or other
items that are not considered to be regular compensation by the committee
administering this Plan pursuant to Section 14 of this Plan. Payroll deductions
shall commence with the first paycheck issued during the Subscription Period
and, except as set forth in Articles 9 and 10, shall continue with each paycheck
throughout the entire Subscription Period, except for pay periods for which the
Eligible Employee receives no compensation (i.e., uncompensated personal leave,
leave of absence, etc.).

SECTION 8.  PURCHASE OF SHARES.

      The Company shall maintain on its books for recordkeeping purposes only a
"Plan Account" in the name of each Eligible Employee who authorized a payroll
deduction (a "partici-

                                       3

pant"). At the close of each pay period, the amount deducted from the
participant's Base Pay shall be credited to the participant's Plan Account. No
interest shall be paid by the Company on any Plan Account balance in any
circumstance. As of the last day of each Subscription Period, the amount then
in the participant's Plan Account shall be divided by the Subscription Price for
such Subscription Period as determined pursuant to Section 6 above, and the
participant's Plan Account shall be credited with the number of whole shares
that results. Fractional shares shall not be credited hereunder. Share
certificates shall be issued and delivered to each participant within a
reasonable time thereafter. Any amount remaining in a participant's Plan Account
shall be carried forward to the next Subscription Period, but shall not
otherwise reduce the amount a participant may contribute pursuant to Section 7
of this Plan during the next Subscription Period. If a participant does not
accumulate sufficient funds in his Plan Account to purchase at least ten shares
of Class A Common Stock during a Subscription Period, such participant shall be
deemed to have withdrawn from this Plan pursuant to Section 9 of this Plan.

      If the number of shares subscribed for during any Subscription Period
exceeds the number of shares available for purchase under this Plan, the
remaining shares available for purchase shall be allocated among all
participants in proportion to their Plan Account balances, exclusive of any
amounts carried forward pursuant to the preceding paragraph. If the number of
shares that would be credited to any participant's Plan Account in either or
both of the Subscription Periods occurring during any calendar year exceeds the
limit specified in Section 2(c) of this Plan, the participant's Plan Account
shall be credited with the maximum number of shares permissible, and the
remaining amounts shall be refunded to Participants in cash without interest
thereon.

SECTION 9.  WITHDRAWAL FROM THIS PLAN.

      A participant other than a Section 16 Officer may withdraw from this Plan
at any time by giving a properly completed and executed written notice of
withdrawal to the Company. As soon as practicable following receipt of a notice
of withdrawal, the amount credited to the participant's Plan Account shall be
refunded in cash without interest thereon. No further payroll deductions shall
be made with respect to such participant except in accordance with an
authorization for a new payroll deduction filed during a subsequent Enrollment
Period in accordance with Section 4 of this Plan. A participant's withdrawal
shall not affect the participant's eligibility to participate during any
succeeding Subscription Period. A withdrawal by a Section 16 Officer, other than
a withdrawal under Section 10 of this Plan, shall not become effective until the
Subscription Period that commences after the date written notice of such
withdrawal is received by the Company.

SECTION 10.  SEPARATION FROM EMPLOYMENT.

      Separation from employment for any reason, including death, disability or
retirement (as hereinafter defined) shall be treated as an automatic withdrawal
pursuant to Section 9 of this Plan. However, at the election of a participant
who retires, or in the event of a participant's death at the election of the
participant's beneficiary, any cash balance in such participant's Plan Account
may be used to purchase the appropriate number of whole shares of Common Stock
at a Subscription Price determined in accordance with Section 6 of this Plan
using the date of the participant's retirement or death as though it was the
last day of the Subscription Period. Any cash balance in the Plan Account after
such purchase shall be refunded in cash to the participant,

                                       4

or in the event of the participant's death to the participant's beneficiary
without interest thereon. A transfer of employment among the Company, the Mutual
Company or any Participating Subsidiary or a change in status that causes an
employee to no longer be an Eligible Employee shall not be treated as a
separation from employment. As used in this Section 10, "retirement" means a
termination of employment by reason of a participant's retirement at or after
the participant's earliest permissible retirement date pursuant to and in
accordance with his or her employer's regular retirement plan or practice.

SECTION 11.  ASSIGNMENT AND TRANSFER PROHIBITED.

      No participant may assign, pledge, hypothecate or otherwise dispose of his
or her subscription or rights to subscribe under this Plan to any other person,
and any attempted assignment, pledge, hypothecation or disposition shall be
void, provided that a participant may acquire the shares of Class A Common Stock
subscribed to under this Plan in the name of the participant and another person
jointly with the right of survivorship upon appropriate written notice to the
Company. No subscription or right to subscribe granted to a participant under
this Plan shall be transferable by the participant otherwise than by will or by
the laws of descent and distribution, and such subscription rights shall be
exercisable, during the participant's lifetime, only by the participant.

SECTION 12.  ADJUSTMENT OF AND CHANGES IN THE COMMON STOCK.

      In the event that the outstanding shares of Class A Common Stock of the
Company are hereafter increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company, or of
another corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend (either in
shares of the Class A Common Stock or of another class of the Company's stock),
spin-off or combination of shares, appropriate adjustments shall be made by the
committee appointed pursuant to Section 14 of this Plan in the aggregate number
and kind of shares that are reserved for sale under this Plan.

SECTION 13.  AMENDMENT OR DISCONTINUANCE OF THIS PLAN.

      The Board of Directors of the Company (the "Board") shall have the right
to amend, modify or terminate this Plan at any time without notice, provided
that no participant's existing rights are adversely affected thereby and
provided further that, without the approval of the holders of the stockholders
of the Company in accordance with applicable law and regulations, no such
amendment shall increase the benefits accruing to participants under this Plan,
increase the total number of shares subject to this Plan, change the formula by
which the price at which the shares shall be sold is determined, or change the
class of employees eligible to participate in this Plan.

SECTION 14.  ADMINISTRATION.

      This Plan shall be administered by a committee to be appointed by the
Board consisting of three employees of the Company. The committee may from time
to time adopt rules and regulations for carrying out this Plan. Any
interpretation or construc-

                                       5

tion of any provision of this Plan by the Board shall be final and conclusive on
all persons. Any interpretation or construction of any provision of this Plan by
the committee shall be final and conclusive on all persons absent contrary
action by the Board.

SECTION 15.  DESIGNATION OF BENEFICIARY.

      A participant may file a written designation of a beneficiary who is to
receive any cash credited to the participant under this Plan in the event of
such participant's death prior to the delivery to the participant of such cash.
Such designation of a beneficiary may be changed by the participant at any time
upon written notice. Upon the death of a participant and upon receipt by the
committee of proof of the participant's death and of the identity and existence
of a beneficiary validly designated by the participant under this Plan, the
Company shall deliver such cash to such beneficiary. In the event of the death
of a participant and in the absence of a beneficiary

validly designated under this Plan who is living at the time of such
participant's death, the Company shall deliver such cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its sole discretion, may deliver such cash to the spouse or to any one or
more dependents or relatives of the participant, or if no spouse, dependent, or
relative is known to the Company, then to such other person as the Company may
designate. No designated beneficiary shall, prior to the death of the
participant by whom the beneficiary has been designated, acquire any interest in
the shares or cash credited to the participant under this Plan.

SECTION 16.  EMPLOYEES' RIGHTS.

      Nothing contained in this Plan shall prevent the Company, the Mutual
Company or any Participating Subsidiary from terminating any employee's
employment. No employee shall have any rights as a stockholder of the Company by
reason of participation in this Plan unless and until certificates representing
the shares of Class A Common Stock for which the participant has subscribed
shall have been issued and delivered by the Company.

SECTION 17.  USE OF FUNDS.

      All payroll deductions received or held by the Company under this Plan may
be used by the Company for any corporate purpose, and the Company shall not be
obligated to segregate such payroll deductions. Any account established for a
Participant shall be for recordkeeping purposes only.

SECTION 18.  GOVERNMENT REGULATIONS.

      The Company's obligation to sell and deliver Class A Common Stock under
this Plan is subject to any prior approval or compliance that may be required to
be obtained or made from or with any governmental or regulatory authority in
connection with the authorization, issuance or sale of such Class A Common
Stock.

SECTION 19.  TITLES.

      Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.

                                       6

SECTION 20.  APPLICABLE LAW.

      This Plan shall be construed, administered and governed in all respects
under the laws of the Commonwealth of Pennsylvania and the United States of
America.

SECTION 21.  COMPLIANCE WITH RULE 16B-3.

      To the extent that Rule 16b-3 under the Exchange Act applies to purchases
made under this Plan, it is the intent of the Company that this Plan comply in
all respects with the requirements of Rule 16b-3, that any ambiguities or
inconsistencies in the construction of this Plan be interpreted to give effect
to such intention and that if this Plan shall not so comply, whether on the date
of adoption or by reason of any later amendment to or interpretation of Rule
16b-3, the provisions of this Plan shall be deemed to be automatically amended
so as to bring them into full compliance with such rule.

SECTION 22.  APPROVAL OF STOCKHOLDERS.

      Prior to June 30, 2001, this Plan shall be submitted for approval by the
stockholders of the Company in accordance with applicable law and regulations.
Subscriptions for the purchase of shares under this Plan shall be subject to the
condition that this Plan shall be approved by the stockholders of the Company
prior to such date in the manner contemplated by Section 423(b)(2) of the Code.
If not so approved prior to such date, this Plan shall terminate, all
subscriptions hereunder shall be cancelled and be of no further force or effect
and all participants shall be entitled to the prompt refund in cash, without
interest, of all sums previously deducted from their compensation pursuant to
this Plan.

                                       7

                                 DONEGAL GROUP INC.

                           2001 AGENCY STOCK PURCHASE PLAN
                           -------------------------------

                              AS ADOPTED MARCH 8, 2001

1.    Purpose.
      -------

      The Donegal Group Inc. 2001 Agency Stock Purchase Plan (this "Plan") has
been established by Donegal Group Inc. (the "Company") for the benefit of
eligible independent insurance agencies of the Company and Donegal Mutual
Insurance Company (the "Mutual Company"), and the Company's subsidiary and
affiliated insurance companies, which shall be those insurance companies 50% or
more of whose stock is owned by the Company or the Mutual Company or with which
the Mutual Company has a management agreement (collectively, the "Companies").
This Plan provides an Eligible Agency (as defined in Section 2) an opportunity
to acquire a long-term proprietary interest in the Company through the purchase
of the Company's Class A Common Stock (the "Class A Common Stock") at a discount
from current market prices. In offering this Plan, the Company seeks to foster
the common interests of the Company and Eligible Agencies in achieving long-term
profitable growth for the Company. Accordingly, the Company has created this
Plan to facilitate the purchase and long-term investment in shares of the Class
A Common Stock by Eligible Agencies.

2.    Eligible Agencies.
      -----------------

      An agency designated as an Eligible Agency by the Company is thereafter
eligible to participate in this Plan. An Eligible Agency shall be an agency
that, as determined by the Company in its discretion, is an agency that brings
value to the Companies and with which the Companies seek a long-term
relationship. The eligibility criteria the Company will consider will include
the agency's premium volume, the potential growth of such premium volume, the
profitability of the agency's business and whether the agency has been placed on
rehabilitation by the Company or had its binding authority revoked. The Company,
in its discretion, may base eligibility on agency segmentation class or any
other factors that indicate value, directly or indirectly, to the Companies.
Continued eligibility will be subject to the Company's periodic review. A
pattern of immediate resale of the Class A Common Stock acquired under this Plan
by an Eligible Agency shall be a factor in the Company's determination whether
an agency should remain eligible for continued participation in this Plan
because immediate resales would tend to indicate that an Eligible Agency is not
seeking to share in the long-term profitable growth of the Companies. A decision
by the Company, in its discretion, to discontinue the eligibility of an agency
under this Plan, will be treated as an automatic withdrawal from this Plan. See
Section 9 below.

3.    Methods of Payment and Amount of Contribution.
      ---------------------------------------------

      There shall be three methods of payment to purchase shares of the Class A
Common Stock under this Plan. Subject to the provisions of Section 11(b), an
Eligible Agency may elect any of the payment methods individually or in
combination. In each Subscription Period (as

defined in Section 4) an Eligible Agency may contribute an aggregate maximum of
$12,000 toward the purchase of Class A Common Stock under all payment methods
combined (the "Maximum Amount"), subject to the limitations set forth below:

      (a) An Eligible Agency may elect to purchase Class A Common Stock through
deductions from its monthly direct bill commission payments. Under this method,
an Eligible Agency shall designate no less than 1% and no more than 10% of the
Eligible Agency's direct bill commission payments to be withheld from the
Eligible Agency's direct bill commission payments; provided, however, that no
more than $12,000 will be withheld by the Company from direct bill commission
payments during each Subscription Period. Direct bill commission payments shall
mean the commissions earned and that are actually available for payment in a
monthly period to an Eligible Agency for personal and commercial direct bill
policies after all offsetting debits and credits are applied, as determined
solely from the Company's records.

      (b) An Eligible Agency may elect to purchase Class A Common Stock during
each October 1 through March 31 Subscription Period through a deduction from the
contingent commission, if any, payable to the Eligible Agency under the
applicable agency contingent plan or its equivalent. Under this method, an
Eligible Agency shall designate a percentage of the contingent commission to be
withheld by the Company subject to the Maximum Amount.

      (c) An Eligible Agency may elect to purchase Class A Common Stock through
lump-sum payments to the Company. Under this method, the Eligible Agency shall
pay to the Company a dollar amount in a lump sum by the last day of the
applicable Subscription Period (September 30 or March 31). The amount of the
lump sum payment shall not be less than $1,000 nor more than the Maximum Amount.

      At the end of each Subscription Period, each Eligible Agency's direct bill
commission payments, if any, shall be totaled and added to all lump-sum and/or
contingent commission payments, if any, made by such agency. If at any time
during a Subscription Period an Eligible Agency's total payments exceed the
Maximum Amount for that Subscription Period then, upon request by the Eligible
Agency, such excess amount shall be returned by the Company to the Eligible
Agency without interest within a reasonable period. Any such amount not returned
shall be applied to the purchase of Class A Common Stock during the next
Subscription Period without reducing the Maximum Amount applicable to such
Subscription Period.

4.    Duration of This Plan and Subscription Periods.
      ----------------------------------------------

      This Plan shall be in effect from September 15, 2001 through and including
September 30, 2006. During the term of this Plan, there will be ten semi-annual
"Subscription Periods." Each Subscription Period will extend from October 1
through March 31 or from April 1 through September 30, respectively, beginning
with October 1, 2001 and ending on September 30, 2006.

5.    Enrollment and Enrollment Periods.
      ---------------------------------

      Enrollment for participation in this Plan based on withholding from direct
bill commissions shall take place in the "Enrollment Period" preceding each
Subscription Period, which shall be from the 15th through the 30th day of
September and from the 15th through the 31st day of March of each year
commencing with September 15, 2001. An Eligible Agency shall be sent a

                                      -2-

Subscription Agreement prior to the beginning of first Enrollment Period
following such agency's designation as an Eligible Agency. An Eligible Agency
that desires to subscribe for the purchase of Class A Common Stock through
withholding from direct bill commissions must return a duly executed and
completed Subscription Agreement during the first applicable Enrollment Period.
Once enrolled, an Eligible Agency shall continue to participate in this Plan for
each succeeding Subscription Period until it ceases to be an Eligible Agency or
chooses to withdraw from this Plan pursuant to Section 9. If an Eligible Agency
desires to change its rate of contribution, it may do so effective for the next
Subscription Period by filing a new Subscription Agreement during the Enrollment
Period for the next Subscription Period. An Eligible Agency that wishes to make
lump-sum purchases during a Subscription Period shall remit each lump-sum
payment to the Company with a supplemental Subscription Agreement by the last
day of the applicable Subscription Period (September 30 or March 31). An
Eligible Agency that wishes to make a purchase during the October 1 through
March 31 Subscription Period through designation of a portion of its contingent
commission under the agency contingent plan shall file a Subscription Agreement
during the Enrollment Period applicable to that Subscription Period.

6.    Number of Shares To Be Offered.
      ------------------------------

      The total number of shares to be made available under this Plan is 300,000
shares of Class A Common Stock of the Company. In the event all 300,000 shares
of Class A Common Stock are purchased prior to the expiration of this Plan, this
Plan may be terminated in accordance with Section 13 of this Plan.

7.    Subscription Price.
      ------------------

      The "Subscription Price" for each share of Class A Common Stock shall be
equal to 90% of the average of the closing prices of the Class A Common Stock on
the Nasdaq Stock Market on the last ten trading days of the applicable
Subscription Period; provided, however, that the Subscription Price shall never
be less than the par value per share of the Class A Common Stock.

8.    Purchase of Shares.
      ------------------

      The Company will maintain a "Plan Account" on behalf of each enrolled
Eligible Agency. As of the last day of each Subscription Period, the aggregate
amount deducted from the Eligible Agency's direct bill commission payments and
contingent commission withholding and lump-sum payments, not to exceed the
Maximum Amount permitted pursuant to Section 3 of this Plan from all three
payment methods, shall be credited to the Eligible Agency's Plan Account. At
such time, the amount then contained in the Eligible Agency's Plan Account shall
be divided by the Subscription Price for such Subscription Period and each Plan
Account will be credited with the number of whole shares that results. Any
amount remaining in the Plan Account will be carried forward to the next
Subscription Period or, at the option of the Eligible Agency, returned to the
Eligible Agency. Any amount so carried forward will not reduce the Maximum
Amount applicable to such succeeding Subscription Period. If the number of
shares subscribed for during any Subscription Period exceeds the number of
shares available for sale under this Plan, the remaining shares shall be
allocated among all Eligible Agencies in proportion to their aggregate Plan
Account balances, exclusive of any amounts carried forward as provided in
Sections 3 and 8 of this Plan. Stock certificates will be issued and delivered
to each Eligible Agency with respect to the shares it has purchased hereunder
within a reasonable time thereafter.

                                      -3-

9.    Withdrawal from This Plan.
      -------------------------

      An enrolled Eligible Agency may withdraw from this Plan at any time by
giving written notice of withdrawal to the Company, which written notice shall
be signed on behalf of the Eligible Agency by an authorized representative.
Promptly after the time of withdrawal or the discontinuance of an Eligible
Agency's eligibility, certificates representing any shares held under this Plan
shall be issued in the name of the Eligible Agency and the amount of any cash
credited to the Eligible Agency's Plan Account for the current Subscription
Period shall be refunded by the Company without interest. If an Eligible Agency
withdraws, such Eligible Agency may not resubscribe until after the next full
Subscription Period has elapsed, and then only if it has been redesignated by
the Company as an Eligible Agency.

10.   Termination of Agency Status.
      ----------------------------

      Termination of agency status for any reason shall be treated as an
automatic withdrawal from this Plan pursuant to Section 9.

11.   Assignment and Issuance of Shares.
      ---------------------------------

      Except as expressly permitted by this Section 11, no Eligible Agency may
assign its subscription payments under this Plan or rights to subscribe under
this Plan to any other person (including its shareholders, partners or other
principals), and any attempted assignment shall be void. Neither an Eligible
Agency's rights under this Plan nor shares held in an Eligible Agency's Plan
Account may be transferred, pledged, hypothecated or assigned. All shares issued
under this Plan shall be titled in the name of the Eligible Agency; provided,
however, that an Eligible Agency may, upon written request to the Company: (a)
designate that such shares be issued to a shareholder, partner, other principal
or other licensed employee of such Eligible Agency, or (b) designate that any
retirement plan maintained by or for the benefit of such Eligible Agency or a
shareholder, partner, other principal or other licensed employee of such
Eligible Agency may purchase shares in lieu of such Eligible Agency through
lump-sum payments made by the designee, subject to the $12,000 Maximum Amount
limitation set forth in Section 3, compliance with applicable laws, including
the Employee Retirement Income Security Act of 1974, as amended, and, if
applicable, payment by the Eligible Agency or its designee of any applicable
transfer taxes and satisfaction of the Company's usual requirements for
recognition of a transfer of Class A Common Stock.

12.   Adjustment of and Changes in the Class A Common Stock.
      -----------------------------------------------------

      In the event that the outstanding shares of Class A Common Stock are
hereafter increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of the Company, or of another
corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend either in
shares of the Class A Common Stock or of another class of the Company's stock,
spin-off or combination of shares, appropriate adjustments shall be made by the
Committee appointed pursuant to Section 14 of this Plan in the aggregate number
and kind of shares that are reserved for sale under this Plan.

                                      -4-

13.   Amendment or Discontinuance of This Plan.
      ----------------------------------------

      The Board of Directors of the Company shall have the right to amend,
modify or terminate this Plan at any time without notice provided that no
participant's existing rights are adversely affected thereby.

14.   Administration.
      --------------

      This Plan shall be administered by a committee (the "Committee")
consisting of three persons appointed from time to time by the Board of
Directors of the Company. The Committee may from time to time adopt rules and
regulations for carrying out this Plan. Interpretation or construction of any
provision of this Plan by the Committee shall be final and conclusive on all
persons absent contrary action by the Board of Directors.

15.   Titles.
      ------

      Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Plan.

16.   Applicable Law.
      --------------

      This Plan shall be construed, administered and governed in all respects
under the laws of the Commonwealth of Pennsylvania and the United States of
America.

826517
                                      -5-

                            STOCK PURCHASE AGREEMENT

                                     Between

                        DONEGAL MUTUAL INSURANCE COMPANY

                                       and

                                DONEGAL GROUP INC.

                                 Relating to the
                                  Capital Stock
                                       of

                            PIONEER INSURANCE COMPANY

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

RECITALS       ...........................................................     1

ARTICLE I - REPRESENTATIONS, WARRANTIES AND AGREEMENTS
                 OF THE STOCKHOLDER.......................................     1

      1.1      Organization...............................................     1
      1.2      Subsidiaries...............................................     2
      1.3      Authority..................................................     2
      1.4      Capital Structure..........................................     2
      1.5      No Distributions on Capital Stock..........................     2
      1.6      Financial Statements.......................................     3
      1.7      Material Changes Since December 31, 1999...................     3
      1.8      Availability of Assets and Legality of Use.................     3
      1.9      Title to Property..........................................     3
      1.10     Insurance Regulatory Matters...............................     3
      1.11     Conduct of Business........................................     4
      1.12     No Undisclosed Liabilities.................................     4
      1.13     No Default, Violation or Litigation........................     4
      1.14     Tax Liabilities............................................     5
      1.15     Employee Relations.........................................     4
      1.16     Corporate Name.............................................     4
      1.17     No Omissions...............................................     4
      1.18     Finders....................................................     6
      1.19     Representations and Warranties To Be True
                 on the Closing Date......................................     6

ARTICLE II - REPRESENTATIONS, WARRANTIES AND AGREEMENTS
                  OF THE BUYER............................................     6

      2.1      Organization of the Buyer..................................     6
      2.2      Corporate Authority........................................     6
      2.3      Finders....................................................     6
      2.4      Representations and Warranties To Be True
                 on the Closing Date......................................     7

ARTICLE III - ACTION PRIOR TO THE CLOSING DATE............................     7

      3.1      Preserve Accuracy of Representations
                 and Warranties...........................................     7
      3.2      Maintain the Company as a Going Concern....................     7
      3.3      Make No Material Change in the Company.....................     7

                                       (i)

      3.4      No Public Announcement.....................................     8
      3.5      Insurance Law Compliance...................................     8

ARTICLE IV - ADDITIONAL COVENANTS OF THE STOCKHOLDER
                  AND THE BUYER...........................................     8

      4.1      Use of Name................................................     8
      4.2      Additional Tax Information.................................     8

ARTICLE V - PURCHASE PRICE AND CLOSING....................................     9

      5.1      Closing Date...............................................     9
      5.2      Purchase and Sale..........................................     9
      5.3      Delivery by the Stockholder................................     9
      5.4      Delivery by the Buyer......................................     9

ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS
                  OF THE BUYER............................................    10

      6.1      No Misrepresentation or Breach of
                 Covenants and Warranties.................................    10
      6.2      No Changes in or Destruction of Property...................    10
      6.3      Legal Matters..............................................    10
      6.4      Approval by Counsel........................................    10
      6.5      Fairness Opinion...........................................    11
      6.6      Opinion of Counsel for the Stockholder.....................    11
      6.7      Reinsurance Agreement......................................    12

ARTICLE VII - CONDITIONS PRECEDENT TO OBLIGATIONS
                   OF THE STOCKHOLDER.....................................    12

      7.1      No Misrepresentation or Breach of
                 Covenants and Warranties.................................    12
      7.2      Legal Matters..............................................    12

ARTICLE VIII - TERMINATION................................................    13

      8.1      Termination................................................    13

ARTICLE IX - SURVIVAL OF OBLIGATIONS; INDEMNIFICATION.....................    13

      9.1      Survival of Obligations....................................    13
      9.2      Indemnification............................................    13

                                      (ii)

ARTICLE X - MISCELLANEOUS.................................................    15

      10.1     Notices....................................................    15
      10.2     Expenses...................................................    15
      10.3     Governing Law..............................................    15
      10.4     Successors and Assigns.....................................    16
      10.5     Partial Invalidity.........................................    16
      10.6     Waivers....................................................    16
      10.7     Execution in Counterparts..................................    16
      10.8     Titles and Headings........................................    16
      10.9     Entire Agreement; Amendments and Waivers...................    16

SIGNATURES     ...........................................................    17

Appendix A     Form of Note...............................................   A-1
Appendix B     Form of Aggregate Excess of Loss Reinsurance Agreement.....   B-1

                                      (iii)

                            STOCK PURCHASE AGREEMENT

      THIS STOCK PURCHASE AGREEMENT (the "Agreement") made and entered into as
of the 20th day of July, 2000 between DONEGAL GROUP INC., a corporation
organized under the laws of the State of Delaware (the "Buyer"), and DONEGAL
MUTUAL INSURANCE COMPANY, a mutual casualty insurance company organized under
the laws of the Commonwealth of Pennsylvania (the "Stockholder") which owns all
of the issued and outstanding shares (the "Shares") of capital stock of PIONEER
INSURANCE COMPANY, a New York stock casualty insurance company (the "Company").

                                   WITNESSETH:

      WHEREAS, the Stockholder desires to sell the Shares to the Buyer pursuant
to the terms and conditions set forth in this Agreement; and

      WHEREAS, the Buyer desires to purchase the Shares from the Stockholder on
the terms and conditions set forth in this Agreement;

      NOW, THEREFORE, the Buyer and the Stockholder, in consideration of the
agreements, covenants and conditions contained herein, hereby make the
following representations and warranties, give the following covenants and
agree as follows:

                                    ARTICLE I

                    REPRESENTATIONS, WARRANTIES AND AGREEMENTS
                               OF THE STOCKHOLDER

      As an inducement to the Buyer to enter into this Agreement and to
consummate the transactions contemplated herein, the Stockholder represents and
warrants to the Buyer and agrees as follows:

      1.1  Organization. The Stockholder is a mutual casualty insurance company
           ------------
duly organized, validly existing and in good standing under the Insurance
Company Law of the Commonwealth of Pennsylvania. The Company is a stock casualty
insurance company duly organized, validly existing and in good standing under
the laws of the State of New York and is duly admitted to transact insurance and
is in good standing in the jurisdictions listed in Schedule T to the Company's
Annual Statement as filed with the New York Insurance Department for the year
ended December 31, 1999 (the "1999 Annual Statement"). The Company has the
corporate power and authority and other authorizations necessary or required in
order for it to own or lease and operate its properties and to carry on its
business as now conducted.

      1.2  Subsidiaries.  The Company has no subsidiaries.
           ------------

                                       -1-

      1.3  Authority. This Agreement and the transactions contemplated herein
           ---------
have been duly approved by all necessary action on the part of the Stockholder.
This Agreement, when executed and delivered by the Stockholder and, assuming the
due execution hereof by the Buyer, will constitute the valid, legal and binding
agreement of the Stockholder enforceable in accordance with its terms. Neither
the execution nor the delivery of this Agreement nor the consummation of the
transactions contemplated herein, nor compliance with nor fulfillment of the
terms and provisions hereof, will (i) conflict with or result in a breach of the
terms, conditions or provisions of or constitute a default under the governing
instruments of the Stockholder or the Company, any instrument, agreement,
mortgage, judgment, order, award, decree or other restriction to which the
Company or the Stockholder is a party or by which either of them is bound or any
statute or regulatory provision affecting either of them; (ii) give any party to
or with rights under any such instrument, agreement, mortgage, judgment, order,
award, decree or other restriction the right to terminate, modify or otherwise
change the rights or obligations of the Company under such instrument,
agreement, judgment, order, award, decree, mortgage or other restriction or
(iii) require the approval, consent or authorization of or any filing with or
notification to any federal, state or local court, governmental authority or
regulatory body, except as may be required by the Pennsylvania Insurance Company
Law and the New York Insurance Law. The Stockholder has full power and authority
to sell, assign, transfer and deliver the Shares to the Buyer pursuant to this
Agreement and to do and perform all acts and things required to be done by the
Stockholder under this Agreement.

      1.4  Capital Structure. The authorized capital stock of the Company
           -----------------
consists of 100,000 Common Shares, par value $14.00 per share, of which 100,000
Common Shares are issued and outstanding, and none of which is held by the
Company as treasury shares. Except for this Agreement, there are no agreements,
arrangements, options, warrants or other rights or commitments of any character
relating to the issuance, sale, purchase or redemption of any shares of capital
stock of the Company, and no such agreements, arrangements, options, warrants
or other rights or commitments will be entered into or granted between the date
hereof and the Closing Date (as defined in Section 5.1 hereof). All of the
Shares of the Company are validly issued, fully paid and nonassessable with no
liability attaching to the ownership thereof, and are owned of record and
beneficially by the Stockholder free and clear of any liens, claims,
encumbrances or restrictions of any kind; and the transfer and delivery of the
Shares to the Buyer by the Stockholder as contemplated by this Agreement will be
sufficient to transfer good and marketable record and beneficial title to such
outstanding shares to the Buyer, free and clear of liens, claims, encumbrances
or restrictions of any kind.

      1.5  No Distributions on Capital Stock. The Company has never purchased
           ---------------------------------
or redeemed any shares of its outstanding capital stock, and, since December 31,
1999, has not declared or paid any dividend or made any other distribution in
respect of its capital stock.

      1.6  Financial Statements. The Company has furnished to the Buyer the
           --------------------
Annual Statements of the Company as of December 31, 1998 and 1999 and an
unaudited balance sheet and statement of operations as of June 30, 2000
(collectively, the "Financial Statements").

                                       -2-

All of such Financial Statements are correct and complete in all material
respects and fairly present the financial position of the Company at the
respective dates thereof and the results of its operations for the respective
periods covered thereby, and have been prepared in conformity with accounting
principles prescribed or permitted by the Insurance Department of the State of
New York consistently applied throughout all periods.

      1.7  Material Changes Since December 31, 1999. Since December 31, 1999,
           ----------------------------------------
the business of the Company has been operated only in the ordinary course and,
whether or not in the ordinary course of business, other than as disclosed in
this Agreement or in the Financial Statements, there has not been, occurred or
arisen (i) any material adverse change in the financial condition of the Company
from that shown on the 1999 Annual Statement; (ii) any damage or destruction in
the nature of a casualty loss, whether covered by insurance or not, to any
property or business of the Company which is material to the financial
condition, operations or business of the Company; (iii) any material increase in
any employee benefit plan maintained by the Company; (iv) any amendment or
termination of any agreement or cancellation or reduction of any debt owing to
the Company or waiver or relinquishment of any right of material value to the
Company or (v) any other event, condition or state of facts of any character
which materially and adversely affects the results of operations or business,
financial condition or property of the Company.

      1.8  Availability of Assets and Legality of Use. The assets owned or
           ------------------------------------------
leased by the Company constitute all of the assets that are being used in its
business. Such assets are in good and serviceable condition, normal wear and
tear excepted, and suitable for the uses for which intended, and such assets and
their uses conform in all material respects to all applicable laws.

      1.9  Title to Property. The Company has good and marketable title to all
           -----------------
of its assets, including the assets reflected on the 1999 Annual Statement and
all of the assets thereafter acquired by it, except to the extent that such
assets have thereafter been disposed of for fair value in the ordinary course of
business.

      1.10 Insurance Regulatory Matters.
           ----------------------------

           (a) The Company is properly authorized to transact the lines of
business it is currently transacting in each jurisdiction in which it is
admitted to transact business;

           (b) The Company has furnished the Buyer with copies of all
reinsurance and coinsurance treaties pursuant to which the Company cedes or
assumes insurance and all assumption reinsurance agreements;

           (c) The Company has furnished the Buyer with a true and complete
specimen of the form of each type of insurance policy issued by the Company at
any time since December 31, 1995 which is currently in force or under which the
Company currently has obligations, as well as any underwriting manuals utilized
by the Company in connection with each type of policy currently being issued;
and

                                       -3-

           (d) The Company has made all filings required to be made by the
Company with any state insurance department, such filings were in material
compliance with applicable law when filed and no material deficiencies have been
asserted by any state insurance department in connection with any such filing.

      1.11 Conduct of Business.
           -------------------

           (a) The Stockholder has advised the Buyer of all claims which are
pending or, to the knowledge of the Stockholder, threatened against the Company.
No insurance carrier has denied coverage of any claim or accepted investigation
of any such loss or defense of any such claim under a reservation of rights. The
reserves established by the Company as of December 31, 1999 are adequate to
cover the Company's liability, net of insurance coverage, for all such claims.

           (b) To the knowledge of the Stockholder after due inquiry, no
employee, agent or representative of the Company has, in relation to the
Company's insurance business, at any time exceeded the authority or abused or
wrongfully exercised any discretion granted to him with regard to the acceptance
of business on behalf of the Company. The Company has not failed to have
underwritten any risk in respect of which evidence of insurance coverage has
been issued. The Company has not exceeded any authority granted to it by any
party to bind it in connection with the Company's business. Without limiting the
generality of the foregoing, no factual basis exists for any claim against the
Company based on any act or omission: (i) in the placing or failing to place
insurance coverage; (ii) in advice given or representations made with respect to
the availability or non-availability of insurance coverage, the existence,
adequacy, amount, scope or nature of any such coverage, the acts or occurrences
covered, deductibles or required primary or coinsurance or (iii) in the making
of declarations or furnishing of information to any insurance carrier.

      1.12 No Undisclosed Liabilities. The Company is not subject to any
           --------------------------
material liability, including unasserted claims, absolute or contingent, which
is not shown or which is in excess of amounts shown or reserved for in the June
30, 2000 balance sheet referred to in Section 1.6 hereof, other than liabilities
of the same nature as those set forth in such balance sheet and reasonably
incurred in the ordinary course of its business after June 30, 2000.

      1.13 No Default, Violation or Litigation. The Company is not in default in
           -----------------------------------
any material respect under any agreement, lease or other document to which it is
a party, or in violation in any material respect of any law, rule, order, writ,
injunction or decree of any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality.
Except in the ordinary course of the Company's business, there are no lawsuits,
proceedings, claims or governmental investigations pending or, to the knowledge
of the Stockholder, threatened against the Company or against the properties or
business thereof, and the Stockholder knows of no factual basis for any such
lawsuit, proceeding, claim or investigation and there is no action, suit,
proceeding or investigation pending, threatened or contemplated which questions
the legality, validity or propriety of the transactions contemplated by this
Agreement.

                                       -4-

      1.14 Tax Liabilities. All federal, state, county, local and foreign
           ---------------
income, use, excise, property, sales, business activity and other tax returns
which are required to be filed by or in respect of the Company up to and
including the date hereof have been filed and all taxes, including any interest
and penalties thereon, which have become due pursuant to such returns or
pursuant to any assessment have been paid and no extension of the time for
filing of any such return is presently in effect. All such returns which have
been filed or will be filed by or in respect of the Company for any period
ending on or before the Closing Date are or will be true and correct.

      1.15 Employee Relations. The Company has not engaged in any unfair labor
           ------------------
practice, unlawful employment practice or unlawful discriminatory practice in
the conduct of its business. The Company has complied in all respects with all
applicable laws, rules and regulations relating to wages, hours and collective
bargaining and has withheld all amounts required by agreement to be withheld
from the wages or salaries of its employees. The relations of the Company with
its employees are satisfactory and the Company is not a party to or affected by
or threatened with or, to the knowledge of the Stockholder, in danger of being a
party to or affected by, any labor dispute which materially interferes or would
materially interfere with the conduct of its business. During the year ended
December 31, 1999, the total annual compensation, including bonuses, payable to
any one employee of the Company did not exceed the sum of $100,000. Since
December 31, 1999, there has been no material increase in the compensation
payable to any such employees of the Company.

      1.16 Corporate  Name.  The Company owns and possesses,  to the exclusion
           ---------------
of the Stockholder  and its  affiliates,  all rights to the use of the name
Pioneer Insurance Company.

      1.17 No Omissions. None of the representations or warranties of the
           ------------
Stockholder contained herein, and none of the other information or documents
furnished to the Buyer or its representatives by the Stockholder or the Company
in connection with this Agreement, is false or misleading in any material
respect or omits to state a fact herein or therein necessary to make the
statements herein or therein not misleading in any material respect. To the
knowledge of the Stockholder, there is no fact which adversely affects, or in
the future is likely to affect adversely, the business or assets of the Company
in any material respect which has not been disclosed in writing to the Buyer.

      1.18 Finders. Neither the Company nor the Stockholder has paid or become
           -------
obligated to pay any fee or commission to any broker, finder or intermediary for
or on account of the transactions provided for in this Agreement. Neither the
Company nor the Stockholder has any agreement or obligation whatsoever with
entities other than the Buyer regarding any proposed acquisition of the Company
by any such entity and neither of them is engaged in any negotiations with any
such entity for any such acquisition.

      1.19 Representations and Warranties To Be True on the Closing Date. All
           -------------------------------------------------------------
representations and warranties set forth in this Article I will be true and
correct on the Closing Date.

                                       -5-

                                   ARTICLE II

                    REPRESENTATIONS, WARRANTIES AND AGREEMENTS
                                  OF THE BUYER

      As an inducement to the Stockholder to enter into this Agreement and to
consummate the transactions contemplated herein, the Buyer represents and
warrants to the Stockholder and agrees as follows:

      2.1  Organization of the Buyer. The Buyer is a corporation duly organized,
           -------------------------
validly existing and in good standing under the laws of the State of Delaware.

      2.2  Corporate Authority. This Agreement and the Note (as defined herein)
           -------------------
and the transactions contemplated herein have been duly approved by all
necessary corporate action on the part of the Buyer. This Agreement and the
Note, when executed and delivered by the Buyer and, assuming due execution
hereof by the Stockholder, will constitute the valid and binding agreements of
the Buyer enforceable in accordance with their respective terms. Neither the
execution nor the delivery of this Agreement, nor the consummation of the
transactions contemplated herein and therein, nor compliance with nor
fulfillment of the terms and provisions hereof and thereof, will (i) conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under the governing instruments of the Buyer, any
instrument, agreement, mortgage, judgment, order, award, decree or other
restriction to which the Buyer is a party or by which it is bound or any statute
or regulatory provisions affecting it or (ii) require the approval, consent or
authorization of or any filing with or notification to any federal, state or
local court, governmental authority or regulatory body except as may be required
by the Pennsylvania Insurance Company Law or the New York Insurance Law. The
Buyer has, and will have at the Closing Date, full power and authority to
purchase the Shares pursuant to this Agreement and to do and perform all acts
and things required to be done by the Buyer under this Agreement.

      2.3  Finders. The Buyer has not paid or become obligated to pay any fee or
           -------
commission to any broker, finder or intermediary for or on account of the
transactions provided for in this Agreement.

      2.4  Representations and Warranties To Be True on the Closing Date.  All
           -------------------------------------------------------------
of the representations and warranties set forth in this Article II will be true
and correct on the Closing Date.

                                       -6-

                                   ARTICLE III

                        ACTION PRIOR TO THE CLOSING DATE

      The parties covenant to take the following action between the date hereof
and the Closing Date:

      3.1  Preserve Accuracy of Representations and Warranties. The Stockholder
           ---------------------------------------------------
shall refrain from taking any action, and shall cause the Company to refrain
from taking any action, which would render any representation or warranty
contained in Article I of this Agreement inaccurate as of the Closing Date
hereunder. The Stockholder will promptly notify the Buyer of any lawsuits,
claims, proceedings or investigations that, to the knowledge of the Stockholder,
may be threatened, brought, asserted or commenced against the Company, its
officers or directors or the Stockholder (i) involving in any way the
transactions contemplated by this Agreement or (ii) which would, if determined
adversely to the Company, have a material adverse impact on the business,
properties or assets of the Company.

      3.2  Maintain the Company as a Going Concern. The Stockholder shall cause
           ---------------------------------------
the Company to conduct its business in accordance with past practices and to use
its best efforts to maintain the business organization of the Company intact and
preserve the good will of its agents, brokers, employees, customers and others
having business relations with it. The Stockholder shall cause the Company to
provide the Buyer promptly with interim monthly financial information and any
other management reports as and when they shall become available.

      3.3  Make No Material Change in the Company. Prior to the Closing Date,
           --------------------------------------
the Stockholder shall not, without the prior written approval of the Buyer,
cause or permit the Company to (i) make any material change in the business or
operations of the Company; (ii) make any material change in the accounting
policies applied in the preparation of the Company's financial statements
included in the 1999 Annual Statement; (iii) declare any dividends on its issued
and outstanding shares of capital stock or make any other distribution of any
kind in respect thereof; (iv) issue, sell or otherwise distribute any authorized
but unissued shares of its capital stock or effect any stock split or
reclassification of any such shares or grant or commit to grant any option,
warrant or other rights to subscribe for or purchase or otherwise acquire any
shares of capital stock of the Company or any security convertible or
exchangeable for any such shares; (v) purchase or redeem any of the capital
stock of the Company; (vi) incur or be liable for indebtedness to the
Stockholder or any of its subsidiaries or affiliates; (vii) make any material
change in the compensation of officers or key employees of the Company; (viii)
enter into any contract, license, franchise or commitment other than in the
ordinary course of business or waive any rights of substantial value; (ix) make
any donation to any charitable, civic, educational or other eleemosynary
institution in excess of donations made in comparable past periods or (x) enter
into any other transaction affecting in any material respect the business of the
Company other than in the ordinary

                                       -7-

course of business and in conformity  with past practices or as  contemplated by
this Agreement.

      3.4  No Public Announcement. Neither the Stockholder nor the Buyer shall,
           ----------------------
without the approval of the other, make any press release or other public
announcement or filing concerning the transactions contemplated by this
Agreement, except as and to the extent that any such party shall be so obligated
by law, in which case the other party shall be advised thereof and given an
opportunity to comment thereon.

      3.5  Insurance Law Compliance. The Buyer and the Stockholder have made all
           ------------------------
filings with the Pennsylvania Insurance Department and the New York Insurance
Department, including any notifications, requests for exemptions and other
information, required to be filed under the Pennsylvania Insurance Company Law
and the New York Insurance Law, as the case may be, or any rules and regulations
promulgated thereunder, with respect to the transactions contemplated hereby.
Each party warrants that all such filings by it will be, as of the date filed,
true and accurate and in accordance with the requirements of the Pennsylvania
Insurance Company Law and the New York Insurance Law, as the case may be, and
any such rules and regulations. Each of the Buyer and the Stockholder agrees to
make available to the other such information as each of them may reasonably
request relative to its business, assets and property as may be required of each
of them to file any additional information requested by the Pennsylvania
Insurance Department under the Pennsylvania Insurance Company Law and any such
rules and regulations and the New York Insurance Department under the New York
Insurance Law and any such rules and regulations.

                                   ARTICLE IV

                     ADDITIONAL COVENANTS OF THE STOCKHOLDER
                                  AND THE BUYER

      4.1  Use of Name. From and after the Closing Date, the Company and its
           -----------
successors, assigns and affiliates shall own or possess, to the exclusion of
the Stockholder and any person controlling or controlled by the Stockholder, all
rights to use the name Pioneer Insurance Company.

      4.2  Additional Tax Information. The Stockholder agrees promptly to
           --------------------------
deliver to the Buyer any information in the Stockholder's possession reasonably
requested by the Buyer in connection with any tax returns relating to the
Company (whether filed prior to the Closing Date or to be filed thereafter). The
Stockholder shall have access to such records of the Company as shall reasonably
be required to enable the Stockholder to prepare any tax returns for periods
ending on or before the Closing Date.

                                       -8-

                                    ARTICLE V

                           PURCHASE PRICE AND CLOSING

      5.1  Closing Date. Subject to the fulfillment of the conditions precedent
           ------------
specified in Articles VI and VII hereof, the transactions contemplated by this
Agreement shall be consummated at 10:00 a.m. on the date selected by the Buyer
and effective on a date that is a month end, but in no event later than October
31, 2000 (the "Closing Date") at the offices of the Buyer at 1195 River Road,
Marietta, Pennsylvania 17547.

      5.2  Purchase and Sale. On the Closing Date, the Buyer shall purchase from
           -----------------
the Stockholder, and the Stockholder shall sell to the Buyer, the Shares for a
purchase price equal to the statutory surplus of the Company as of June 30, 2000
as adjusted to reflect any difference between the market value of the Company's
bond portfolio as of June 30, 2000 and the market value of such bond portfolio
as of the Closing Date (the "Purchase Price"). The Purchase Price shall be paid
by delivery of the Buyer's promissory note (the "Note"), in substantially the
form of Appendix A hereto, to the Stockholder at the Closing with the principal
amount of the Note to be equal to the Purchase Price as estimated by the
Stockholder. Upon final determination of the Purchase Price by the mutual
agreement of the Buyer and the Stockholder, the Buyer shall deliver to the
Stockholder a new Note (the "Adjusted Note"), in substantially the form of
Appendix A hereto, in the principal amount of the Purchase Price as finally
determined and the Stockholder shall return the Note marked "Cancelled" to the
Buyer.

      5.3  Delivery by the Stockholder. In addition to the deliveries called for
           ---------------------------
by Article VI hereof on the Closing Date, the Stockholder shall deliver to the
Buyer a certificate or certificates representing all of the Shares, together
with fully executed and witnessed stock powers (in blank) attached thereto with
signatures guaranteed by a bank or trust company or a member firm of the New
York Stock Exchange, Inc.

      5.4  Delivery by the Buyer. In addition to the deliveries called for by
           ---------------------
Article VII hereof, on the Closing Date, the Buyer shall deliver to the
Stockholder the Note duly executed.

                                   ARTICLE VI

                 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER

      The obligations of the Buyer under this Agreement to purchase and pay for
the Shares shall, at the option of the Buyer, be subject to the satisfaction, on
or prior to the Closing Date, of the following conditions:

      6.1  No Misrepresentation or Breach of Covenants and Warranties.  There
           ----------------------------------------------------------
shall have been no breach by the Stockholder or the Company in the performance
of any of their respective covenants and agreements herein, each of the
representations and warranties of

                                       -9-

the Stockholder and the Company contained or referred to in this Agreement shall
be true and correct in all material respects on the Closing Date as though made
on the Closing Date and there shall have been delivered to the Buyer a
certificate or certificates to that effect, dated the Closing Date and signed on
behalf of the Stockholder and the Company by their respective President or any
Vice President.

      6.2  No Changes in or Destruction of Property. There shall have been,
           ----------------------------------------
between the date hereof and the Closing Date, (i) no material adverse change in
the condition, financial or otherwise, of the Company; (ii) no adverse federal,
state or local legislative or regulatory change affecting in any material
respect the services or business of the Company and (iii) the properties and
assets of the Company shall not have been materially damaged by fire, flood,
casualty, act of God or the public enemy or other cause, regardless of insurance
coverage for such damage, so as to impair in any material respect the ability of
the Company to render services or continue operations. There shall have been
delivered to the Buyer a certificate, dated the Closing Date, and signed on
behalf of the Stockholder by its President or a Vice President (a) to the effect
that between the date hereof and the Closing Date there has been no such
material adverse change as stated in clause (i) hereof and no such material
damage as stated in clause (iii) hereof and (b) further stating that nothing has
come to the signer's attention, in the course of his activities on behalf of the
Company, which causes him to believe that during such period there occurred any
adverse federal, state or local legislative or regulatory change affecting in
any material respect the services or business of the Company.

      6.3  Legal Matters. All approvals required under the Pennsylvania
           -------------
Insurance Company Law and the New York Insurance Law shall have been obtained
and no action, suit, investigation or proceeding shall have been instituted or
threatened by any person, corporation or governmental agency to restrain,
prohibit, collect damages arising out of or otherwise challenge the legality or
validity of the transactions contemplated herein.

      6.4  Approval by Counsel. All matters, proceedings, instruments and
           -------------------
documents required to carry out this Agreement or incidental thereto and all
other relevant legal matters shall have been approved at or before the Closing
Date by Nikolaus & Hohenadel, counsel to the Buyer, which approval shall not be
unreasonably withheld.

      6.5  Fairness Opinion. Not later than the Closing Date, the Buyer shall
           ----------------
have received the written opinion of an independent party experienced in the
valuation of casualty insurance companies and as selected by mutual agreement of
the Buyer and the Stockholder to the effect that the purchase of the Shares by
the Buyer from the Stockholder on the terms and conditions set forth in this
Agreement is fair to the Buyer and its stockholders from a financial point of
view.

      6.6  Opinion of Counsel for the Stockholder.  The Buyer shall have
           --------------------------------------
received from Duane, Morris & Heckscher LLP, special counsel to the Stockholder,
an opinion dated the

                                      -10-

Closing Date, in form and substance satisfactory to the Stockholder and its
counsel, to the effect that:

           (a) The Stockholder is a mutual casualty insurance company duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and the Stockholder has the corporate power and
authority to consummate the transactions as provided for herein;

           (b) This Agreement and the transactions contemplated herein have
been duly approved by all necessary corporate action on the part of the
Stockholder and this Agreement has been duly and validly executed and delivered
by the Stockholder; this Agreement, assuming due execution hereof by the Buyer,
is the valid and binding agreement of the Stockholder enforceable against the
Stockholder in accordance with its terms, except as enforcement of this
Agreement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and that the remedy of
specific performance is subject to the discretion of the court before which
proceedings therefor are brought;

           (c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated herein, nor compliance with and
fulfillment of the terms and provisions hereof (i) conflicts with or results in
the breach of the terms, conditions or provisions of the governing instruments
of the Stockholder or any agreement or instrument known to such counsel to
which the Stockholder is a party or by which it is bound; (ii) gives any party
to or with rights under any such agreement or instrument the right to terminate,
modify or otherwise change the rights or obligations of the Stockholder under
any such agreement or instrument or (iii) requires the consent, approval or
authorization of or any filing with or notification to any federal, state or
local court, governmental authority or regulatory body not already obtained or
made, as the case may be; and

           (d) Such counsel do not know of any action, suit, proceeding or
investigation pending or threatened against the Stockholder which questions the
legality, validity or propriety of (i) this Agreement or of (ii) any action
taken or to be taken by the Stockholder hereto pursuant to or in connection with
this Agreement.

      In giving such opinion, Duane, Morris & Heckscher LLP may rely, as to
matters of fact, upon certificates of officers of the Buyer and, as to matters
relating to the law of any jurisdiction other than the Commonwealth of
Pennsylvania, the State of Delaware and the State of New York, upon the opinions
of other counsel satisfactory to them, provided that such counsel shall state
that they believe that they are justified in relying upon such certificates and
opinions and deliver copies thereof to the Buyer prior to the Closing Date.

      6.7  Reinsurance Agreement. Not later than the Closing Date, the Company
           ---------------------
and the Stockholder shall have entered into an aggregate excess of loss
reinsurance agreement, in substantially the form of Appendix B hereto, pursuant
to which the Stockholder shall reinsure the Company against any loss, adjusted
on a quarterly basis recalculated at the end

                                      -11-

of each calendar quarter, from: (a) any adverse development in the Company's
loss reserve and loss adjustment expense reserve at December 31, 2001 compared
to the amount of such reserves at December 31, 1999 in respect of all policy
years ending on or before December 31, 1999 and (b) all losses and loss
adjustment expenses incurred by the Company during the years ending December 31,
2000 and December 31, 2001 by reason of the fact that the Company's loss and
loss adjustment expense ratios for those periods exceeds 60%, it being
understood that any calculations made pursuant to this clause (b) for the years
ending December 31, 2000 and December 31, 2001 shall reflect any recoveries by
the Company under the loss development section of such aggregate excess of loss
reinsurance agreement.

                                   ARTICLE VII

                     CONDITIONS PRECEDENT TO OBLIGATIONS OF
                                 THE STOCKHOLDER

      The obligations of the Stockholder under this Agreement to sell and
receive payment for the Shares shall, at the option of the Stockholder, be
subject to the satisfaction, on or prior to the Closing Date, of the following
conditions:

      7.1  No Misrepresentation or Breach of Covenants and Warranties. There
           ----------------------------------------------------------
shall have been no breach by the Buyer in the performance of any of its
covenants herein, each of the representations and warranties of the Buyer
contained or referred to in this Agreement shall be true and correct in all
material respects on the Closing Date as though made on the Closing Date, and
there shall have been delivered to the Stockholder a certificate or certificates
to that effect, dated the Closing Date and signed on behalf of the Buyer by the
President or any Vice President of the Buyer.

      7.2  Legal Matters. All approvals required under the Pennsylvania
           -------------
Insurance Company Law and the New York Insurance Law shall have been obtained,
and no action, suit, investigation or proceeding shall have been instituted or
threatened by any person, corporation or governmental agency to restrain,
prohibit, collect damages arising out of or otherwise challenge the legality or
validity of the transactions contemplated herein.

                                  ARTICLE VIII

                                   TERMINATION

      8.1  Termination. This Agreement shall be terminated and there shall
           -----------
thereafter be no liability of any party to any other party hereunder, at any
time prior to the Closing Date:

           (a) By the mutual consent of the Buyer and the Stockholder; or

                                      -12-

           (b) By the Buyer or the Stockholder, if the transactions
contemplated herein are not closed on or before October 31, 2000.

                                   ARTICLE IX

                     SURVIVAL OF OBLIGATIONS; INDEMNIFICATION

      9.1  Survival of Obligations. All certifications, representations and
           -----------------------
warranties made herein by the Stockholder and its obligations to be performed
pursuant to the terms hereof, shall survive the Closing Date hereunder,
notwithstanding any notice of any inaccuracy, breach or failure to perform not
waived in writing and notwithstanding the consummation of the transactions
contemplated herein with knowledge of such inaccuracy, breach or failure. All
representations and warranties contained herein shall terminate two years after
the Closing Date; provided, that (i) the representations and warranties
contained in Section 1.14 hereof shall expire upon the earlier to occur of (x)
final judicial determination of any claim or settlement and satisfaction of any
judgment or full payment of any settlement, as the case may be, or (y) such
time, if any, as the claim shall be barred by the applicable statute of
limitations and (ii) the representations and warranties contained in Section 1.6
hereof with respect to reserve adequacy and Sections 1.4 and 1.9 hereof shall
not terminate.

      9.2  Indemnification.
           ---------------

           (a) The Stockholder agrees to indemnify and hold harmless the Buyer,
the Company and their successors and assigns (collectively, the "Indemnified
Persons") from and against any and all (x) liabilities, losses, costs,
deficiencies or damages ("Loss") and (y) reasonable attorneys' and accountants'
fees and expenses, court costs and all other reasonable out-of-pocket expenses
("Expense") incurred by any Indemnified Person, in each case net of any
insurance proceeds received and retained by such Indemnified Person, in
connection with or arising from (i) any claim that the Stockholder did not
convey to the Buyer good and marketable title to all of the issued and
outstanding capital stock of the Company pursuant to this Agreement, (ii) any
breach by the Stockholder of any of its covenants in, or any failure of the
Stockholder to perform any of its obligations under, this Agreement, (iii) the
Company's membership in an affiliated or consolidated group of which the
Stockholder is a member or (iv) any breach of any warranty or the inaccuracy of
any representation of the Stockholder contained or referred to in this Agreement
or in any certificate delivered by or on behalf of the Stockholder pursuant
hereto; provided that the Stockholder's liability under this Section 9.2 shall
be limited to the Purchase Price.

           (b) If the Buyer believes that any Indemnified Person has suffered
or incurred any Loss or incurred any Expense, the Buyer shall so notify the
Stockholder promptly in writing describing such Loss or Expense, the amount
thereof, if known, and the method of computation of such Loss or Expense, all
with reasonable particularity and containing a reference to the provision of
this Agreement or any certificate delivered pursuant hereto in respect of which
such Loss or Expense shall have occurred. If any action

                                      -13-

at law or suit in equity is instituted by or against a third party with respect
to which any Indemnified Person intends to claim any liability or expense as
Loss or Expense under this Section 9.2, such Indemnified Person shall promptly
notify the Stockholder of such action or suit.

           (c) Subject to paragraph (d) of this Section 9.2, the Indemnified
Persons shall have the right to conduct and control, through counsel of their
choosing, any third party claim, action or suit and may compromise or settle the
same, provided that any of the Indemnified Persons shall give the Stockholder
advance notice of any proposed compromise or settlement. The Indemnified Persons
shall permit the Stockholder to participate in the defense of any such action or
suit through counsel chosen by it, provided that the fees and expenses of such
counsel shall be borne by the Stockholder. Any compromise or settlement with
respect to a claim for money damages effected after the Stockholder, by notice
to the Indemnified Persons, shall have disapproved such compromise or settlement
shall discharge the Stockholder from liability with respect to the subject
matter thereof and no amount in respect thereof shall be claimed as Loss or
Expense under this Section 9.2.

           (d) If the remedy sought in any action or suit referred to in
paragraph (c) of this Section 9.2 is solely money damages and the sum of (i) the
amount claimed in such action or suit, (ii) all amounts previously paid by the
Stockholder pursuant to this Section 9.2 and (iii) all amounts claimed in all
pending claims for indemnity under this Section 9.2 does not exceed the
aggregate liability of the Stockholder under this Section 9.2, the Stockholder
shall have 15 business days after receipt of the notice referred to in the last
sentence of paragraph (b) of this Section 9.2 to notify the Indemnified Persons
that it elects to conduct and control such action or suit. If the Stockholder
does not give the foregoing notice, the Indemnified Persons shall have the right
to defend, contest, settle or compromise such action or suit in the exercise of
their exclusive discretion and the Stockholder shall, upon request from any of
the Indemnified Persons, promptly pay to such Indemnified Persons in accordance
with the other terms of this Section 9.2 the amount of any Loss resulting from
its liability to the third party claimant and all related Expense. If the
Stockholder gives the foregoing notice, the Stockholder shall have the right to
undertake, conduct and control, through counsel of its own choosing and at the
sole expense of the Stockholder, the conduct and settlement of such action or
suit, and the Indemnified Persons shall cooperate with the Stockholder in
connection therewith; provided that (x) the Stockholder shall not thereby permit
to exist any lien, encumbrance or other adverse charge upon any asset of any
Indemnified Person, (y) the Stockholder shall permit the Indemnified Persons to
participate in such conduct or settlement through counsel chosen by the
Indemnified Persons, but the fees and expenses of such counsel shall be borne by
the Indemnified Persons, except as provided in clause (z) hereof and (z) the
Stockholder shall agree promptly to reimburse to the extent required under this
Section 9.2 the Indemnified Persons for the full amount of any Loss resulting
from such action or suit and all related Expense incurred by the Indemnified
Persons, except fees and expenses of counsel for the Indemnified Persons
incurred after the assumption of the conduct and control of such action or suit
by the Stockholder. So long as the Stockholder is contesting any such action or
suit in good faith, the Indemnified Persons shall not pay or settle any such
action or suit. Notwithstanding the foregoing, the Indemnified Persons shall
have the right

                                      -14-

to pay or settle any such action or suit, provided that in such event the
Indemnified Persons shall waive any right to indemnity therefor by the
Stockholder and no amount in respect thereof shall be claimed as Loss or Expense
under this Section 9.2.

                                    ARTICLE X

                                  MISCELLANEOUS

      10.1 Notices.  All notices or other communications required or permitted
           -------
hereunder shall be in writing and shall be given by confirmed telex or telecopy
or certified mail addressed, if to the Buyer, to: Donegal Group Inc., 1195 River
Road, Marietta, Pennsylvania 17547, Attention: Donald H. Nikolaus; and, if to
the Stockholder, to: Donegal Mutual Insurance Company, 1195 River Road,
Marietta, Pennsylvania 17547, Attention: Ralph G. Spontak.

      10.2 Expenses. Except as otherwise provided herein, each party hereto
           --------
shall pay its own expenses, including, without limitation, legal and accounting
fees and expenses, incident to its negotiation and preparation of this Agreement
and to its performance and compliance with the provisions contained herein. The
Buyer and the Stockholder shall share equally the cost of any fairness opinion
delivered pursuant to this Agreement.

      10.3 Governing Law.  This Agreement shall be governed by and construed in
           -------------
accordance with the laws of the Commonwealth of Pennsylvania without regard to
its rules on conflicts of law.

      10.4 Successors and Assigns. This Agreement shall be binding upon and
           ----------------------
inure to the benefit of the parties hereto and their respective successors and
assigns, provided that the rights of the Stockholder herein may not be assigned
and the rights of the Buyer may only be assigned (a) to such other business
organization which shall succeed to substantially all the assets, liabilities
and business of the Buyer or (b) to a wholly owned subsidiary of the Buyer, in
which event such assignment shall not relieve the Buyer of any of the Buyer's
obligations to the Stockholder under this Agreement.

      10.5 Partial Invalidity. In case any one or more of the provisions
           ------------------
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein unless the deletion of such provision
or provisions would result in such a material change as to cause completion of
the transactions contemplated herein to be unreasonable.

      10.6 Waivers.  The Stockholder and the Buyer may, by written instrument,
           -------
extend the time for the performance of any of the obligations or other acts of
the other party and

                                      -15-

with respect to this Agreement, (a) waive any inaccuracies in the
representations and warranties of the other party in this Agreement or in any
document delivered pursuant to this Agreement, (b) waive compliance with any of
the covenants of the other party contained in this Agreement and (c) waive the
other party's performance of any of its obligations set out in this Agreement.
Any agreement on the part of the parties hereto for any such extension or waiver
shall be validly and sufficiently authorized for the purposes of this Agreement
if, as to the Buyer, it is authorized by Donald H. Nikolaus and, as to the
Stockholder, it is authorized by Ralph G. Spontak.

      10.7 Execution in Counterparts. This Agreement may be executed in two or
           -------------------------
more counterparts, all of which shall be considered one and the same agreement
and shall become a binding agreement when one or more counterparts have been
signed by each of the parties and delivered to each of the other parties.

      10.8 Titles and Headings. Titles and headings to Articles and Section
           -------------------
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.

      10.9 Entire Agreement; Amendments and Waivers. This Agreement contains the
           ----------------------------------------
entire understanding of the parties hereto with regard to the subject matter
contained herein. The parties hereto, by mutual agreement in writing, may amend,
modify and supplement this Agreement. The failure of any party hereto to enforce
at any time any provision of this Agreement shall not be construed to be a
waiver of such provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of such party hereafter to enforce
each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.

                                      -16-

      IN WITNESS WHEREOF, the parties hereto have executed these presents the
day and year first above written.

                                   DONEGAL GROUP INC.

                                   By: /s/ Donald H. Nikolaus
                                      ------------------------------------------
                                      Donald H. Nikolaus, President
                                        and Chief Executive Officer

                                   DONEGAL MUTUAL INSURANCE COMPANY

                                   By: /s/ Ralph G. Spontak
                                      ------------------------------------------
                                      Ralph G. Spontak, Senior Vice President,
                                        Chief Financial Officer and Secretary

                                      -17-

                                  LEASE AGREEMENT
                                  ---------------

      THIS LEASE AGREEMENT (this "Lease") dated as of September 1, 2000, between
DONEGAL MUTUAL INSURANCE COMPANY, 1195 River Road, Marietta, Pennsylvania 17547
("Landlord") and PROVINCE BANK FSB, 1205 River Road, Marietta, Pennsylvania
17547 ("Tenant"). This Lease shall become effective (the "Commencement Date") on
the date hereof.

                                 WITNESSETH THAT:

      1.  Premises. Landlord hereby leases to Tenant and Tenant hereby leases
          --------
from Landlord, for the term and upon the conditions and covenants set forth
herein, 3,600 square feet of the building located at 1205 River Road, Marietta,
Pennsylvania 17547 (the "Leased Premises").

      2.  Term. The term (the "Term") of this Lease shall commence on the
          ----
Commencement Date and shall end on the 31st day of August, 2001 (the
"Expiration Date"). Tenant shall have the option to extend the Term of this
Lease on the terms and conditions set forth herein for five successive one-year
periods by giving Landlord written notice of its intent to do so at least 60
days prior to the expiration of the then current Term.

      3.  Rent. Tenant shall pay as rent the sum of $14,000 for the first year
          ----
of the Term, and to the extent extended pursuant to Paragraph 2 above, $16,000
for the second year of the Term and $20,000 for the third, fourth, fifth and
sixth years of the Term. Such sum shall be payable in arrears to Landlord during
the Term hereof, in twelve equal monthly installments payable on the first day
of each month during the Term ("Monthly Rent").

      4.  Taxes and Other Impositions. Landlord agrees to pay the following (all
          ---------------------------
of which are herein called "impositions"): all levies, taxes, assessments
(public or private), water and sewer rents and charges, liens, license and
permit fees, charges for public utilities and all other charges, imposts or
burdens of whatsoever kind and nature, whether or not particularized by name,
and whether general or special, ordinary or extraordinary, foreseen or
unforeseen, which at any time during the Term may be created, levied, assessed,
confirmed, adjudged, imposed or charged upon or with respect to the Leased
Premises located at 1205 River Road, Marietta, Pennsylvania or any improvements
made thereto or on any part of the foregoing or any appurtenances thereto.
Tenant shall not be required to pay any of the foregoing impositions.

      5.  Operating Charges of the Leased Premises. Landlord agrees to pay all
          ----------------------------------------
charges for water and sewer services, all costs and charges for electricity,
heating and air conditioning in connection with the Leased Premises and all
other costs and expenses involved in the care, management and use thereof
(collectively, the "Operating Charges"). Tenant shall not be required to pay any
of the foregoing Operating Charges.

      6.  Insurance. Landlord shall maintain at Landlord's expense throughout
          ---------
the Term:

                                      -1-

          a.  comprehensive general liability insurance coverage which coverage
shall have a combined single limit for bodily injury and property damage
liability in an amount not less than $1,000,000;

          b.  fire and general casualty insurance covering damage to the Leased
Premises in an amount not less than $400,000;

          c.  all such other coverages as Landlord maintains on its premises
situate at 1195 River Road, Marietta, Pennsylvania.

      7.  Maintenance and Repair of the Leased Premises. Landlord shall maintain
          ---------------------------------------------
the Leased Premises and any sidewalks, parking areas, curbs and access ways upon
or adjoining the Leased Premises, and keep the same in good order and condition,
and shall make or cause to be made all repairs necessary to maintain such good
order and condition, whether such repairs be ordinary or extraordinary, foreseen
or unforeseen.

      8.  Alterations; Consent of Landlord. Tenant shall not, without on each
          --------------------------------
occasion first obtaining Landlord's prior written consent, which shall not be
unreasonably withheld by Landlord, make or permit to be made any alterations,
improvements or additions to the Leased Premises.

      9.  Landlord's Right of Entry. Tenant agrees to permit Landlord and the
          -------------------------
authorized representatives of Landlord and of the holder of any mortgage or any
prospective mortgagee to enter the Leased Premises at any time in response to an
emergency and otherwise at all reasonable times and upon reasonable notice to
Tenant for the purpose of inspecting the Leased Premises.

      10. Fire or Other Casualty. In case of damage to the Leased Premises,
          ----------------------
Tenant shall give immediate notice thereof to Landlord. Landlord shall thereupon
cause the damage to be repaired with reasonable speed, using the proceeds of
insurance policies, and subject to delays which may arise by reason of
adjustment of loss under such insurance policies and for delays beyond
reasonable control of Landlord. To the extent and for the time that the Leased
Premises are thereby rendered untenantable, the rent shall proportionately
abate. In the event damage shall be so extensive that Landlord shall decide not
to repair or rebuild, this Lease shall, at the option of Landlord, exercisable
by written notice to Tenant given within 30 days after Landlord is notified of
the casualty, be terminated as of a date specified in such notice (which shall
not be more than 90 days thereafter), and the rent shall be adjusted to the
termination date and Tenant shall thereupon promptly vacate the Leased Premises.

      11. Use of Leased Premises. The Leased Premises shall be used for the
          ----------------------
operation of a federal savings bank and for no other purpose without the prior
written consent of Landlord.

      12. Covenant of Quiet Enjoyment. Landlord covenants that Tenant, upon
          ---------------------------
paying the Monthly Rent and upon observing and keeping all covenants, agreements
and conditions

                                      -2-

of this Lease on its part to be kept, shall quietly have and enjoy the Leased
Premises during the Term without disturbance by anyone claiming by or through
Landlord, subject, however, to the exceptions, reservations and conditions of
this Lease.

      13. Condemnation. If all of the Leased Premises is taken or condemned for
          ------------
a public or quasi-public use under any statute or by right of eminent domain by
any competent authority or sold in lieu of such taking or condemnation, this
Lease shall terminate as of the date the right of possession vests in the
condemnor. In the event such portion of the Leased Premises is so taken so as to
materially interfere with the use of the Leased Premises as a federal savings
bank, Tenant shall have the right to terminate this Lease with 30 days notice to
Landlord, and this Lease shall terminate as of the date set forth in Tenant's
notice. If this Lease is not terminated in accordance with the remainder of this
Paragraph 13, this Lease shall remain in full force and effect.

      14. Assignment or Sublet. Tenant shall not assign this Lease or sublet all
          --------------------
or any portion of the Leased Premises without first obtaining Landlord's prior
written consent, which consent may be withheld in Landlord's sole discretion, in
which event Tenant shall have the right to terminate this Lease upon 30 days
notice to Landlord.

      15. Defaults; Remedies. The failure of Tenant to comply materially with
          ------------------
any term, covenant or condition of this Lease shall constitute an event of
default hereunder. Prior to the exercise by Landlord of any remedies in
connection with an event of default, Landlord shall provide a written notice of
default to Tenant setting forth the basis therefor and Tenant shall have a
period of 30 days from the receipt of such notice in which to cure such default.
If an event of default is not cured by Tenant within such 30-day period,
Landlord shall have the right to exercise all remedies available to Landlord at
law or in equity.

      16. Notices; Payment of Rent. All notices required or permitted hereunder
          ------------------------
shall be in writing and sent by (a) United States registered or certified mail,
return receipt requested, postage prepaid, (b) guaranteed overnight delivery
service or (c) hand delivery, to the appropriate address set forth below or to
such other address as Landlord or Tenant may designate from time to time in a
written notice given to the other.

              To Landlord:    1195 River Road
                              Marietta, Pennsylvania 17547
                              Attention:  President

              To Tenant:      1205 River Road
                              P. O. Box 486
                              Marietta, Pennsylvania 17547
                              Attention:  President

Notices shall be deemed given and effective two business days following the date
deposited in the United States mail, on the next business day if delivered to an
overnight delivery service or on the date of delivery if hand delivered.

                                      -3-

      17. Surrender. At the expiration or earlier termination of this Lease,
          ---------
Tenant shall surrender the Leased Premises in good order and condition, ordinary
wear and tear excepted. Tenant shall not remove any alterations, improvements
and additions made by Tenant (except trade fixtures) and the same shall become
property of Landlord.

      18. Nonwaiver. Any failure of Tenant or Landlord to enforce any remedy
          ---------
allowed for the violation of any provision of this Lease shall not imply the
waiver of any such provision, even if such violation is continued or repeated,
and no express waiver shall affect any provision other than the one(s) specified
in such waiver and only for the time and in the manner specifically stated.

      19. Captions. The captions in this Lease are for convenience only and are
          --------
not a part of this Lease and do not in any way define, limit, describe or
amplify the terms and provisions of this Lease or the scope or intent thereof.

      20. Entire Agreement; Interpretation. This Lease represents the entire
          --------------------------------
agreement between the parties hereto with respect to the Leased Premises. This
Lease shall not be modified in any manner or terminated except by an instrument
in writing executed by the parties.

      21. Severability. If any provision of this Lease is found by a court of
          ------------
competent jurisdiction to be illegal, invalid or unenforceable, the remainder of
this Lease will not be affected, and in lieu of each provision which is found to
be illegal, invalid or unenforceable, there will be added as a part of this
Lease a provision as similar to such illegal, invalid or unenforceable provision
as may be possible and be legal, valid and enforceable.

      22. Governing Law. This Lease will be governed by and construed in
          -------------
accordance with the law of the Commonwealth of Pennsylvania.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -4-

      IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.

                                       LANDLORD:

                                       DONEGAL MUTUAL INSURANCE COMPANY

                                       By: /s/ Donald H. Nikolaus
                                           ------------------------------------
                                           Donald H. Nikolaus, President and
                                           Chief Executive Officer

                                       TENANT:

                                       PROVINCE BANK FSB

                                       By: /s/ William J. McLaughlin
                                           ------------------------------------
                                           William J. McLaughlin, President and
                                           Chief Executive Officer

                                      -5-

                 AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT

                                     between

                            PIONEER INSURANCE COMPANY
                                       and
                        DONEGAL MUTUAL INSURANCE COMPANY

                                    ARTICLE 1
                                    ---------

BUSINESS COVERED
- ----------------
This agreement is entered into as part of an agreement for Donegal Mutual
Insurance Company to sell all of the outstanding stock of Pioneer Insurance
Company, Greenville, New York, to Donegal Group Inc. per the terms of a Stock
Purchase Agreement dated as of January 1, 2001. This Agreement, subject to the
terms and conditions herein contained, is for Donegal Mutual Insurance Company
("Donegal") to indemnify Pioneer Insurance Company ("Pioneer") in respect of the
net liability as herein provided and specified which may accrue to Pioneer as a
result of any loss or losses which may occur during the term of this Agreement
under any and all binders, policies, and contracts of insurance or reinsurance
(hereinafter referred to as "policy" or "policies") heretofore or hereafter
issued or entered into by or on behalf of Pioneer.

                                    ARTICLE 2
                                    ---------
TERRITORY
- ---------
This Agreement shall cover wherever Pioneer's policies cover.

                                    ARTICLE 3
                                    ---------
EXCLUSIONS
- ----------
This Agreement shall not cover:

         A.     Business classified by the Reinsured as:

                1.   Overhead transmission and distribution lines and their
supporting structures other than those on or within 150 meters (or 500 feet) of
the insured premises. It is understood and agreed that public utilities
extension and/or suppliers extension and/or contingent business interruption
coverage are not subject to this exclusion provided that these are not part of a
transmitter's or distributor's policy.

                2.   Pools, Associations, or Syndicates, including State
Insurance Guaranty Associations. However, such operations which Pioneer is
obliged to cover by reason of membership or participation in any Automobile
Assigned Risk Pool, Plan or Facility, any FAIR Plan, or any Coastal Pool are
not to be excluded. Furthermore, this exclusion shall not apply to any
Inter-Company Pooling.

                                       1

                3.   Insurance on Growing and/or Standing Crops.

                4.   Reinsurance of any kind assumed by the Reinsured, except
local agency reinsurance accepted in the normal course of business.

                5.   Bridges, tunnels and art collections valued at over
$150,000,000.

                6.   Aviation.

                7.   Insolvency Funds, as per clause attached.

                8.   Flood, when written as such.

         B.     Extra Contractual Obligations and Loss in Excess of Original
Policy Limits - "Extra Contractual Obligations" are defined as those liabilities
not covered under any other provision of this Agreement and which arise from the
handling of any claim on business covered hereunder, such liabilities arising
because of, but not limited to, the following: failure by Pioneer to settle
within the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its Insured or Reinsured or in the
preparation or prosecution of an appeal consequent upon such action.

The term "Loss in Excess of Original Policy Limits" shall mean a net loss of
Pioneer which is in excess of the limit of its original policy, such loss in
excess of the limit having been incurred because of the following: failure by
Pioneer to settle within the policy limit or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its Insured or
Reinsured or in the preparation or prosecution of an appeal consequent upon such
action.

         C.     Fidelity, Surety, Credit, Title, Insolvency and Financial
Guaranty.

         D.     Loss or Liability excluded by the provisions of the Nuclear
Incident  Exclusion Clause - Physical Damage - Reinsurance, as per clause
attached hereto.

         E.     War, as defined in the original policy.

         F.     Ocean Marine

                                    ARTICLE 4
                                    ---------
TERM
- ----
This Agreement shall become effective on January 1, 2001 at 12:01 A.M. Standard
Time and shall terminate as of December 31, 2002, unless earlier terminated by
mutual consent of Donegal and Pioneer or by 60 days prior written notice of
termination by either party to the other party.

                                      2

                                    ARTICLE 5
                                    ---------
DEFINITION OF LOSS OCCURRENCE
- -----------------------------
The term "Loss Occurrence" shall mean any one occurrence or series of
occurrences arising out of one event.

                                    ARTICLE 6
                                    ---------
NET RETAINED LINES
- ------------------
This Agreement applies only to that portion of any insurance or reinsurance
covered by this Agreement which Pioneer retains net for its own account, and in
calculating the amount of any loss hereunder and also in computing the amount in
excess of which this Agreement attaches, only loss or losses in respect of that
portion of any insurance or reinsurance which Pioneer retains net for its own
account shall be included.

                                    ARTICLE 7
                                    ---------
ULTIMATE NET LOSS INCURRED
- --------------------------
The term "Ultimate Net Loss Incurred" shall be understood to mean the actual
loss or losses incurred or to be incurred by Pioneer under its policies, such
loss or losses to include both allocated and unallocated loss adjusting
expenses, if any, and interest accrued where such interest is part of the
judgement (including amounts recoverable under other reinsurance) and salvages
actually made by Pioneer; provided always that nothing in this Article shall be
construed to mean that losses under this Agreement are not recoverable until
Pioneer's ultimate net loss has been ascertained.

                                    ARTICLE 8
                                    ---------
CEDING OF NET LOSS
- ------------------

         A.     Loss Development
                ----------------

                Pioneer will cede, and Donegal will assume, an amount equal to
the adverse development of losses and loss adjusting expenses reserves, for all
claims with dates of loss prior to January 1, 2001 as developed from January 1,
2001 through December 31, 2002 with calculations made at the end of each
quarter.

         B.     Aggregate Excess of Loss
                ------------------------

                Pioneer will cede, and Donegal will assume, an amount equal to
the excess of the loss and adjusting ratio as determined for the years 2001 and
2002, before this reinsurance, but after any recovery under the "Loss
Development" section of this contract, over a loss and adjusting ratio of 60%.
This excess applied to the Net Earned Premium of Pioneer for 2001 and 2002,
respectively, with interim calculations for each year made at March 31, June 30,
and September 30.

                                       3

         C.     Reports
                -------

                Reports as to Loss Development and Aggregate Excess of Loss are
to be made no latter than 30 days after the end of each calendar quarter during
which the development is in effect and all remittances indicated by any report
shall be due within 15 days after receipt of any report.

                                    ARTICLE 9
                                    ---------
ACCESS TO RECORDS
- -----------------
Pioneer and Donegal, by their duly appointed representatives, shall have the
right at any reasonable time, to examine all papers in the possession of the
other referring to business effected hereunder.

                                   ARTICLE 10
                                   ----------
ERRORS AND OMISSIONS
- --------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made. Such delay, omission or error shall
be rectified immediately upon discovery.

                                   ARTICLE 11
                                   ----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between Pioneer and Donegal with reference to the interpretation of this
Agreement or their rights with respect to any transaction involved, whether such
dispute arises before or after termination of this Agreement, such dispute upon
the written request of either party, shall be submitted to three arbitrators,
one to be chosen by each party, and the third by the two so chosen. If either
party refuses or neglects to appoint an arbitrator within thirty days after the
receipt of written notice from the other party requesting it to do so, the
requesting party may appoint two arbitrators. If the two arbitrators fail to
agree in the selection of a third arbitrator within thirty days of their
appointment, each of them shall name two, of whom the other shall decline one
and the decision shall be made by drawing lots. All arbitrators shall be
disinterested active or retired executive officers of insurance or reinsurance
companies or Underwriters at Lloyd's, London not under the control of either
party to this Agreement.

The arbitrators shall interpret the Agreement and make their decision with
regard to the custom and usage of the insurance and reinsurance business. They
shall issue their decision in writing based upon a hearing in which evidence may
be introduced without following strict rules of evidence, but in which cross
examination and rebuttal shall be allowed. They

                                       4

shall make their award with a view to effecting the general purpose of this
Agreement in a reasonable manner rather than in accordance with a literal
interpretation of the language.

The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgement may be entered
upon the final decision of the arbitrators in any court having jurisdiction.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the third arbitrator and of the
arbitration. Said arbitration shall take place in Greenville, New York unless
some other place is mutually agreed upon by Pioneer and Donegal.

                                   ARTICLE 12
                                   ----------
INSOLVENCY FUNDS EXCLUSION CLAUSE
- ---------------------------------
This Agreement excludes all liability of Pioneer arising, by contract, operation
of law, or otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency find. "Insolvency fund" includes any guaranty
fund, insolvency fund, plan, pool, association, fund or other arrangement,
howsoever denominated, established or governed; which provides for any
assessment of or payment or assumption by the company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.

                                   ARTICLE 13
                                   ----------

INSOLVENCY
- ----------
In the event of the insolvency of the Reinsured, this reinsurance shall be
payable directly to the reinsured, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Reinsured without
diminution because of the insolvency of the Reinsured or because the liquidator,
receiver, conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim. It is agreed, however that the liquidator,
receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the policy or bond reinsured which claim would involve a possible
liability on the part of the Reinsurer within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate such
claim and interpose, at their own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses that they may deem available to the
Reinsured or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable subject to the
approval of the court, against the Reinsured as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Reinsured solely as a result of the defense undertaken
by the Reinsurer.

                                       5

         NUCLEAR INCIDENT EXCLUSION CLAUSE PHYSICAL DAMAGE - REINSURANCE

1.   This Reinsurance does not cover any loss or liability accruing to the
Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.

2.   Without in any way restricting the operation of paragraph (1) of this
Clause, this Reinsurance does not cover any loss or liability accruing to the
Reinsured, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:

     (A)    Nuclear reactor power plants including all auxiliary property on
the site, or

     (B) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor installations, and
"critical facilities" as such, or

     (C) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material", and for
reprocessing, salvaging, chemically separating, storing or disposing of "spent"
nuclear fuel or waste materials, or

     (D) Installations other than paragraph (2) III above using substantial
quantities of radioactive isotopes or other products of nuclear fission.

3.   Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate

     (A) Where Reinsured does not have knowledge of such nuclear reactor power
plant or nuclear installation, or

     (B) Where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive contamination,
however caused. However on and after 1st January 1960 this sub-paragraph (B)
shall only apply provided the said radioactive contamination exclusion
provision has been approved by the Governmental Authority having jurisdiction
thereof.

                                       6

4.   Without in any way restricting the operations of paragraphs (1), (2) and
3) hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.

5.   It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reinsured to be the primary hazard.

6.   The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954, or by any law amendatory thereof.

7.   Reinsured to be sole judge of what constitutes:

     (A) Substantial quantities, and
     (B) The extent of installation, plant or site.

NOTE:    Without in any way restricting the operation of paragraph (1) hereof,
it is understood and agreed that

     (A) All policies issued by the Reinsured on or before 31st December 1957
shall be free from the application of the other provisions of this Clause until
expiry date or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.

     (B) With respect to any risk located in Canada policies issued by the
Reinsured on or before 31st December 1958 shall be free from the application of
the other provisions of this Clause until expiry date or 31st December 1960
whichever first occurs whereupon all the provisions of this Clause shall apply.

                                       7

                        INTEREST AND LIABILITIES CONTRACT

                                       to

                  AGGREGATE EXCESS OF LOSS REINSURANCE CONTRACT

                                     between

                            PIONEER INSURANCE COMPANY

                                       and

                        DONEGAL MUTUAL INSURANCE COMPANY

It is hereby agreed by and between Pioneer Insurance Company ("Pioneer") and
Donegal Mutual Insurance Company ("Donegal") that Donegal will assume a 100%
share and Pioneer will cede a 100% share of the Interests and Liabilities as set
forth in the attached AGGREGATE EXCESS OF LOSS Reinsurance Agreement effective
January 1, 2001.

This Contract made and executed in duplicate this 27th day of December, 2000.

PIONEER INSURANCE COMPANY

/s/ Ralph G. Spontak
- -------------------------------
Ralph G. Spontak, Secretary

DONEGAL MUTUAL INSURANCE COMPANY

/s/ Donald H. Nikolaus
- -------------------------------
Donald H. Nikolaus, President

                                       8

Financial Highlights

YEAR ENDED DECEMBER 31,             2000          1999          1998          1997          1996

INCOME STATEMENT DATA
- --------------------------------------------------------------------------------------------------
                                                                       
  Net premiums earned         $149,713,562  $143,873,970  $116,168,992  $107,302,168  $104,527,038
- --------------------------------------------------------------------------------------------------
  Investment income             15,992,495    13,223,537    11,997,661    11,507,277    10,799,369
- --------------------------------------------------------------------------------------------------
  Total revenues               168,222,999   159,711,107   130,586,365   121,327,606   117,581,664
- --------------------------------------------------------------------------------------------------
  Net income                     8,887,357     6,656,937     9,017,840    10,641,186     8,557,774
- --------------------------------------------------------------------------------------------------
  Net income per common share
- --------------------------------------------------------------------------------------------------
    Basic                             1.02           .80          1.11          1.33          1.10
- --------------------------------------------------------------------------------------------------
    Diluted                           1.02           .80          1.09          1.32          1.09
- --------------------------------------------------------------------------------------------------

BALANCE SHEET DATA
- --------------------------------------------------------------------------------------------------
  Total assets                $439,100,801  $399,732,657  $385,231,506  $304,104,505  $287,990,994
- --------------------------------------------------------------------------------------------------
  Stockholders' equity         113,745,255   103,414,612   100,631,004    91,596,663    81,599,274
- --------------------------------------------------------------------------------------------------
  Book value per share               12.84         12.24         12.27         11.39         10.26
- --------------------------------------------------------------------------------------------------

                                 [ID: BAR CHART]

                          TOTAL REVENUES (in millions)

                 1996      1997      1998      1999      2000
               $117.58   $121.33   $130.59   $159.72   $168.22

                                 [ID: BAR CHART]

                           TOTAL ASSETS (in millions)

                 1996      1997      1998      1999      2000
               $287.99   $304.10   $385.23   $399.73   $439.10

                                 [ID: BAR CHART]

                           STOCKHOLDERS' EQUITY (in millions)

                 1996      1997      1998      1999      2000
                $81.60    $91.60   $100.63   $103.41   $113.75

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION

Donegal Group Inc.  ("DGI" or the "Company") is a regional insurance
holding company doing business in the Mid-Atlantic and Southern states
through its five wholly owned property-casualty insurance subsidiaries,
Atlantic States Insurance Company ("Atlantic States"), Southern Insurance
Company of Virginia ("Southern"), Southern Heritage Insurance Company
("Southern Heritage"), Delaware Atlantic Insurance Company ("Delaware") and
Pioneer Insurance Company of Ohio ("Pioneer- Ohio") (collectively
"Insurance Subsidiaries").  The Company has three operating segments:  the
investment function, the personal lines of insurance and the commercial
lines of insurance.  Products offered in the personal lines of insurance
consist primarily of homeowners and private passenger automobile policies.
Products offered in the commercial lines of insurance consist primarily of
commercial automobile, commercial multiple peril and workers' compensation
policies.  The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo
periodic examination by those departments.  The Insurance Subsidiaries are
also subject to competition from other insurance carriers in their
operating areas.  DGI was formed in September 1986 by Donegal Mutual
Insurance Company (the "Mutual Company"), which owns 62% of the outstanding
common shares of the Company as of December 31, 2000.

    Atlantic States participates in an intercompany pooling arrangement
with the Mutual Company and assumes 70% of the pooled business (65% prior
to July 1, 2000).  Southern cedes 50% of its business to the Mutual Company
and prior to January 1, 2000, Delaware ceded 70% of its workers'
compensation business to the Mutual Company.  Because the Mutual Company
places substantially all of the business assumed from Southern into the
pool, from which the Company has a 70% allocation, the Company's results of
operations include approximately 85% of the business written by Southern.

    In November 1998, the Company acquired all of the outstanding stock of
Southern Heritage.  This transaction was accounted for as a "purchase."
The Company's financial statements include Southern Heritage as a
consolidated subsidiary from November 1, 1998.

    In addition to the Company's Insurance Subsidiaries, it also owned all
of the outstanding stock of Atlantic Insurance Services, Inc.  ("AIS"), an
insurance services organization which provided inspection and policy
auditing information on a fee-for-service basis to its affiliates and the
insurance industry.  The Company sold all of the outstanding shares of AIS
on October 1, 1999.

    During 2000, the Company acquired 45% of the outstanding stock of
Donegal Financial Services Corporation ("DFSC"), a bank holding company.
The remaining 55% of the outstanding stock of DFSC is owned by the Mutual
Company.

    On January 3, 2001, the Company announced that it had purchased all of
the outstanding shares of Pioneer Insurance Company of New York
("Pioneer-NY") from the Mutual Company effective January 1, 2001.

RESULTS OF OPERATIONS 2000 COMPARED TO 1999

Total revenues for 2000 were $168,222,999, which were $8,511,892, or
5.3%, greater than 1999.  Net premiums earned increased to $149,713,562, an
increase of $5,839,592, or 4.1%, over 1999.  The change in Atlantic State's
share of the pooling arrangement with the Mutual Company from 65% to 70%
effective July 1, 2000, accounted for $4,113,078 of the increase in net
premiums earned.  Direct premiums written of the combined pool of Atlantic
States and the Mutual Company increased $13,851,692 or 9.0%.  A 5.1%
increase in the direct premiums written of Southern, a 2.1% decrease in the
direct premiums written of Delaware, a 25.4% increase in the direct
premiums written of Pioneer-Ohio and a 15.6% decrease in the direct
premiums written of Southern Heritage accounted for the majority of the
remaining change.  The Company reported net realized investment gains of
$170,852, compared to net realized investment losses of $38,702 in 1999.
Net realized gains and losses in both years resulted from normal turnover
of the Company's investment portfolio.  As of December 31, 2000, 100.0% of
the Company's bond portfolio was classified as Class 1 (highest quality) by
the National Association of Insurance Commissioners' Securities Valuation
Office.  Investment income increased $2,768,958 in 2000.  An increase in
the average invested assets from $258,218,661 to $272,046,385, and an
increase in the average yield to 5.9% from 5.1% in 1999, accounted for the
change.

    The GAAP combined ratio of insurance operations was 101.5% in 2000,
compared to 106.5% in 1999.  The GAAP combined ratio is the sum of the
ratios of incurred losses and loss expenses to premiums earned (loss
ratio), underwriting expenses to premiums earned (expense ratio) and
policyholder dividends to premiums earned (dividend ratio).  The loss ratio
in 2000 was 68.9%, compared to 69.0% in 1999.  The commercial lines loss
ratio decreased from 68.8% in 1999 to 67.0% in 2000.  The personal lines
loss ratio increased from 69.9% in 1999 to 70.3% in 2000.  The expense
ratio for 2000 was 31.7%, compared to 36.6% in 1999, with the dividend
ratio remaining unchanged at 0.9%.  The expense ratio in 1999 was adversely
affected by a charge to earnings resulting from a restructuring charge of
$2 million which increased the expense ratio by 1.4%.

    Income tax expense (benefit) was $2,935,918, compared to $(3,027,836)
in 1999.  As discussed later, the Company benefited from a federal income
tax law change in 1999.

                               p a g e  1 0

RESULTS OF OPERATIONS 1999 COMPARED TO 1998

Total revenues for 1999 were $159,711,107, which were $29,124,742, or
22.3%, greater than 1998.  Net premiums earned increased to $143,873,970,
an increase of $27,704,978, or 23.9%, over 1998.  The acquisition of
Southern Heritage accounted for $19,674,071, or 71% of the increase in
earned premiums in 1999.  Direct premiums written of the combined pool of
Atlantic States and the Mutual Company increased $9,516,654 or 6.6%.  A
9.4% increase in the direct premiums written of Southern, a 4.9% increase
in the direct premiums written of Delaware and a 13.9% increase in the
direct premiums written of Pioneer-Ohio accounted for the majority of the
remaining change.  The Company reported net realized investment losses of
$38,702, compared to net realized investment losses of $13,562 in 1998.
Net realized losses in both years resulted from normal turnover of the
Company's investment portfolio.  As of December 31, 1999, 99.9% of the
Company's bond portfolio was classified as Class 1 (highest quality) by the
National Association of Insurance Commissioners' Securities Valuation
Office.  Investment income increased $1,225,876.  An increase in the
average invested assets from $208,303,664 to $258,218,661, offset by a
decrease in the average yield to 5.1% from 5.6% in 1998, accounted for the
change.

    The GAAP combined ratio of insurance operations was 106.5% in 1999,
compared to 99.8% in 1998.  The GAAP combined ratio is the sum of the
ratios of incurred losses and loss expenses to premiums earned (loss
ratio), underwriting expenses to premiums earned (expense ratio) and
policyholder dividends to premiums earned (dividend ratio).  The loss ratio
in 1999 was 69.0%, compared to 63.0% in 1998.  The increase in the loss
ratio in 1999 resulted from a deterioration in operating results in both
the commercial and personal lines segments of the Company.  The commercial
lines loss ratio increased from 54.9% in 1998 to 68.8% in 1999, with
results in workers' compensation suffering the largest increase from 46.9%
in 1998 to 68.8% in 1999.  Homeowners results suffered the largest increase
in personal lines as the loss ratio increased from 72.3% in 1998 to 77.1%
in 1999.  This increase was somewhat offset by a decrease in the private
passenger automobile loss ratio from 71.0% in 1998 to 69.4% in 1999.  The
expense ratio for 1999 was 36.6%, compared to 35.4% in 1998, with the
dividend ratio decreasing from 1.4% in 1998 to 0.9% in 1999.  The expense
ratio was adversely affected by a charge to earnings resulting from a
restructuring charge of $2 million which increased the expense ratio by
1.4%.  The dividend ratio decreased due to a higher loss ratio in workers'
compensation in 1999 compared to 1998.

    The Company benefited from a federal income tax law change that was
enacted during 1999 which allows net operating loss carryforwards of an
acquired company to be used to offset future taxable income of other
affiliated companies filing as part of a consolidated tax return.  Prior
law allowed such net operating loss carryforward to be used to offset
taxable income of the acquired company only.  Due to this law change, the
net operating loss carryforward, obtained as part of the acquisition of
Southern Heritage, can now be used to offset taxable income generated by
the other consolidated affiliates.  Because of this change, management
determined that a valuation allowance for Southern Heritage's net operating
loss carryforward is no longer needed, and the Company recognized a tax
benefit of $3,004,524 in 1999.

LIQUIDITY AND CAPITAL RESOURCES

    The Company generates sufficient funds from its operations and
maintains a high degree of liquidity in its investment portfolio.  The
primary source of funds to meet the demands of claim settlements and
operating expenses are premium collections, investment earnings and
maturing investments.  As of December 31, 2000, the Company had no material
commitment for capital expenditures.

    In investing funds made available from operations, the Company
maintains securities' maturities consistent with its projected cash needs
for the payment of claims and expenses.  The Company maintains a portion of
its investment portfolio in relatively short-term and highly liquid assets
to ensure the availability of funds.

    As of December 31, 2000, pursuant to a credit agreement dated December
29, 1995, with Fleet National Bank, the Company had unsecured borrowings of
$40 million.  Such borrowings were made in connection with the acquisitions
of Delaware, Pioneer-Ohio and Southern Heritage and various capital
contributions to the subsidiaries.  Per the terms of the credit agreement,
the Company may borrow up to $40 million at interest rates equal to the
bank's then current prime rate or the then current London interbank
Eurodollar bank rate plus 1.70%.  At December 31, 2000, the interest rates
on the outstanding balances were 9.5% on an outstanding prime rate balance
of $3 million and 8.48% and 8.50188% on outstanding Eurodollar rate
balances of $15 million and $22 million, respectively.  In addition, the
Company pays a rate of 3/10 of 1% per annum on the average daily unused
portion of the bank's commitment.  On each July 27, commencing July 27,
2001, the credit line will be reduced by $8 million.  Any outstanding loan
in excess of the remaining credit line after such reduction will then be
payable.

    The Company's principal sources of cash with which to meet obligations
and pay stockholder dividends are dividends from the Insurance Subsidiaries
which are required by law to maintain certain minimum surplus on a
statutory basis and are subject to regulations under which payment of
dividends from statutory surplus is restricted and may require prior
approval of their domiciliary insurance regulatory authorities.  The
Insurance Subsidiaries are also subject to Risk Based Capital (RBC)
requirements which may further impact their ability to pay dividends.  At
December 31, 2000, all five companies' statutory capital and surplus were
substantially above the RBC requirements.

                               p a g e  1 1

At December 31, 2000, amounts available for distribution as dividends
to DGI without prior approval of the insurance regulatory authorities were
$5,414,419 from Atlantic States, $908,259 from Southern, $323,992 from
Delaware, $581,132 from Pioneer-Ohio and $973,796 from Southern Heritage.

    Net unrealized gains (losses) resulting from fluctuations in the fair
value of investments reported in the balance sheet at fair value were
$(223,675) (net of applicable federal income tax benefit) at December 31,
2000, and $(2,073,989) (net of applicable federal income tax) at December
31, 1999.

CREDIT RISK

The Company provides property and liability coverages through its
subsidiaries' independent agency systems located throughout its operating
area.  The majority of this business is billed directly to the insured,
although a portion of the Company's commercial business is billed through
its agents, who are extended credit in the normal course of business.

    The Company's Insurance Subsidiaries have reinsurance agreements in
place with the Mutual Company, as described in Note 3 of the financial
statements, and with a number of other major authorized reinsurers, as
described in Note 9 of the financial statements.

IMPACT OF INFLATION

Property and casualty insurance premiums are established before the
amount of losses and loss expenses, or the extent to which inflation may
impact such expenses, are known.  Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.

IMPACT OF NEW ACCOUNTING STANDARDS

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company has no derivative instruments or hedging activities as
defined in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment
of SFAS No. 133," which statements became effective January 1, 2001.  On
January 1, 2001, the Company transferred investments with an amortized cost
of $49,433,721 and fair value of $50,227,174 from the held to maturity
classification to the available for sale classification under the
provisions of SFAS No. 133 and 138.  The unrealized holding gain of
$793,453 at January 1, 2001 will be reported in other comprehensive income.
The transfer will not impact net income.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

The Company's exposure to market risk for changes in interest rates is
concentrated in its investment portfolio and, to a lesser extent, its debt
obligations.  The Company monitors this exposure through periodic reviews
of asset and liability positions.  Estimates of cash flows and the impact
of interest rate fluctuations relating to the investment portfolio are
modeled regularly.

    Principal cash flows and related weighted-average interest rates by
expected maturity dates for financial instruments sensitive to interest
rates at December 31, 2000 are as follows:

                                  Principal         Weighted-Average
                                    Cash                Interest
                                    Flows                 Rate
- --------------------------------------------------------------------
Fixed maturities and
  short-term investments:
    2001                        $ 35,918,903              6.54%
    2002                          13,786,717              6.11%
    2003                          21,025,000              5.93%
    2004                          17,925,000              6.09%
    2005                          23,061,639              6.38%
    Thereafter                   157,747,081              6.18%
- --------------------------------------------------------------------
  Total                         $269,464,340
====================================================================
  Market value                  $272,063,475
====================================================================
Debt
    2001                        $  8,000,000              8.57%
    2002                           8,000,000              8.57%
    2003                           8,000,000              8.57%
    2004                           8,000,000              8.57%
    2005                           8,000,000              8.57%
- --------------------------------------------------------------------
  Total                         $ 40,000,000
====================================================================
  Fair value                    $ 40,000,000
====================================================================

    Actual cash flows may differ from those stated as a result of calls and
prepayments.

EQUITY PRICE RISK

    The Company's portfolio of equity securities, which is carried on the
balance sheet at market value, has exposure to price risk.  Price risk is
defined as the potential loss in market value resulting from an adverse
change in prices.  Portfolio characteristics are analyzed regularly and
market risk is actively managed through a variety of techniques.  The
portfolio is diversified across industries, and concentrations in any one
company or industry are limited by parameters established by management.

    The combined total of realized and unrealized equity investment gains
and (losses) were $(655,716), $(404,147), and $(307,147) in 2000, 1999 and
1998, respectively.  During these three years the largest total equity
investment gain and (loss) in a quarter was $897,972 and $(1,395,103),
respectively.

                               p a g e  1 2

Donegal Group Inc.
CONSOLIDATED BALANCE SHEETS

December 31,                                                2000          1999
- --------------------------------------------------------------------------------
                                                              
ASSETS
Investments
  Fixed maturities
    Held to maturity, at amortized cost
      (fair value $141,488,936 and $133,995,994)      $140,023,170  $136,173,547
    Available for sale, at fair value
      (amortized cost $111,905,848 and $103,419,994)   111,990,683   100,043,548
  Equity securities, available for sale, at fair value
    (cost $12,476,948 and $9,043,818)                   12,053,211     9,229,498
  Short-term investments, at cost, which
    approximates fair value                             18,583,856    15,995,257
- --------------------------------------------------------------------------------
    Total investments                                  282,650,920   261,441,850
Cash                                                     5,185,797     3,922,403
Accrued investment income                                3,926,603     3,474,430
Premiums receivable                                     21,480,058    18,218,525
Reinsurance receivable                                  63,153,764    53,070,283
Deferred policy acquisition costs                       12,020,257    11,203,302
Federal income taxes receivable                            222,181       698,969
Deferred tax asset, net                                  7,627,883     9,121,232
Prepaid reinsurance premiums                            37,007,587    32,154,837
Property and equipment, net                              5,016,664     5,516,688
Accounts receivable-securities                             234,817            --
Due from affiliate                                              --       262,954
Other                                                      574,270       647,184
- --------------------------------------------------------------------------------
    Total assets                                      $439,100,801  $399,732,657
================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Losses and loss expenses                            $163,899,270  $149,979,141
  Unearned premiums                                    111,000,905    97,657,020
  Accrued expenses                                       5,722,395     5,888,392
  Drafts payable                                            48,640       597,775
  Reinsurance balances payable                           1,225,896     1,216,034
  Cash dividend declared to stockholders                   797,282       760,673
  Borrowings under line of credit                       40,000,000    37,000,000
  Accounts payable-securities                              959,652     2,500,000
  Due to affiliate                                          87,685            --
  Other                                                  1,613,821       719,010
- --------------------------------------------------------------------------------
    Total liabilities                                  325,355,546   296,318,045
- --------------------------------------------------------------------------------

Stockholders' Equity
  Preferred stock, $1.00 par value, authorized
    2,000,000 shares; none issued
  Common stock, Class A, authorized 15,000,000
    shares; none issued
  Common stock, $1.00 par value, authorized
    20,000,000 shares, issued 8,980,977 and
    8,574,210 shares and outstanding
    8,858,689 and 8,451,922 shares                       8,980,977     8,574,210
  Additional paid-in capital                            45,911,151    43,536,748
  Accumulated other comprehensive loss                    (223,675)   (2,073,989)
  Retained earnings                                     59,968,558    54,269,399
  Treasury stock, at cost                                 (891,756)     (891,756)
- --------------------------------------------------------------------------------
    Total stockholders' equity                         113,745,255   103,414,612
- --------------------------------------------------------------------------------
    Total liabilities and stockholders' equity        $439,100,801  $399,732,657
================================================================================

See accompanying notes to consolidated financial statements.

                               p a g e  1 3

Donegal Group Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31,                     2000           1999           1998
- --------------------------------------------------------------------------------

STATEMENTS OF INCOME

Revenues
  Premiums earned                     $225,498,302   $211,361,789   $172,507,090
  Premiums ceded                        75,784,740     67,487,819     56,338,098
- --------------------------------------------------------------------------------
  Net premiums earned                  149,713,562    143,873,970    116,168,992
  Investment income, net of
    investment expenses                 15,992,495     13,223,537     11,997,661
  Installment payment fees               1,509,093      1,439,334        895,283
  Lease income                             836,997        819,474        753,408
  Service fees                                  --        393,494        784,583
  Net realized investment
    gains (losses)                         170,852        (38,702)       (13,562)
- --------------------------------------------------------------------------------
    Total revenues                     168,222,999    159,711,107    130,586,365
- --------------------------------------------------------------------------------

Expenses
  Losses and loss expenses             157,734,790    145,493,825    110,448,552
  Reinsurance recoveries                54,592,885     46,288,823     37,281,467
- --------------------------------------------------------------------------------
  Net losses and loss expenses         103,141,905     99,205,002     73,167,085
  Amortization of deferred policy
    acquisition costs                   24,925,000     24,608,000     19,490,000
  Other underwriting expenses           22,552,217     28,034,876     21,712,346
  Policy dividends                       1,330,330      1,341,294      1,635,300
  Interest                               3,285,036      1,535,249      1,292,992
  Other                                  1,165,236      1,357,585      1,611,627
- --------------------------------------------------------------------------------
    Total expenses                     156,399,724    156,082,006    118,909,350
- --------------------------------------------------------------------------------
Income before income tax
  expense (benefit)                     11,823,275      3,629,101     11,677,015
Income tax expense (benefit)             2,935,918     (3,027,836)     2,659,175
- --------------------------------------------------------------------------------
Net income                            $  8,887,357   $  6,656,937   $  9,017,840
================================================================================

Net income per common share
  Basic                               $       1.02   $        .80   $       1.11
================================================================================
  Diluted                             $       1.02   $        .80   $       1.09
================================================================================

STATEMENTS OF COMPREHENSIVE INCOME

Net income                            $  8,887,357   $  6,656,937   $  9,017,840
- --------------------------------------------------------------------------------
Other comprehensive income (loss),
  net of tax
  Unrealized gains (losses) on
    securities:
    Unrealized holding gain (loss)
      arising during the period,
      net of income tax expense
      (benefit) of $1,027,717,
      $(1,781,261) and $151,999          1,963,076     (3,414,957)       295,057
    Reclassification adjustment for
      (gains) losses included
      in net income, net of income
      tax expense (benefit) of
      $58,090, $(13,159) and $(4,611)     (112,762)        25,543          8,951
- --------------------------------------------------------------------------------
Other comprehensive income (loss)        1,850,314     (3,389,414)       304,008
- --------------------------------------------------------------------------------
Comprehensive income                  $ 10,737,671   $  3,267,523   $  9,321,848
================================================================================

See accompanying notes to consolidated financial statements.

                               p a g e  1 4

Donegal Group Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                     Accumulated
                                 Common Stock          Additional       Other                                       Total
                            -----------------------      Paid-in    Comprehensive      Retained     Treasury     Stockholders'
                              Shares        Amount       Capital     Income (Loss)     Earnings       Stock         Equity
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                             
Balance,
  January 1, 1998           6,122,431    $6,122,431    $38,932,117    $ 1,011,417    $46,422,454    $(891,756)    $ 91,596,663
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock      141,542       141,542      2,339,205                                                   2,480,747
Net income                                                                             9,017,840                     9,017,840
Other comprehensive income                                                304,008                                      304,008
Cash dividends
  $.3375 per share                                                                    (2,768,254)                   (2,768,254)
Stock dividend              2,061,248     2,061,248                                   (2,061,248)
- ------------------------------------------------------------------------------------------------------------------------------
Balance,
  December 31, 1998         8,325,221    $8,325,221    $41,271,322    $ 1,315,425    $50,610,792    $(891,756)    $100,631,004
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock      248,989       248,989      2,265,426                                                   2,514,415
Net income                                                                             6,656,937                     6,656,937
Other comprehensive loss                                               (3,389,414)                                  (3,389,414)
Cash dividends
  $.36 per share                                                                      (2,998,330)                   (2,998,330)
- ------------------------------------------------------------------------------------------------------------------------------
Balance,
  December 31, 1999         8,574,210    $8,574,210    $43,536,748    $(2,073,989)   $54,269,399    $(891,756)    $103,414,612
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock      406,767       406,767      2,349,773                                                   2,756,540
Net income                                                                             8,887,357                     8,887,357
Other comprehensive income                                              1,850,314                                    1,850,314
Grant of stock options                                      24,630                       (24,630)                           --
Cash dividends
  $.36 per share                                                                      (3,163,568)                   (3,163,568)
- ------------------------------------------------------------------------------------------------------------------------------
Balance,
  December 31, 2000         8,980,977    $8,980,977    $45,911,151    $  (223,675)   $59,968,558    $(891,756)    $113,745,255
==============================================================================================================================

See accompanying notes to consolidated financial statements.

                               p a g e  1 5

Donegal Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,                     2000           1999           1998
- --------------------------------------------------------------------------------
                                                           
Cash Flows from Operating Activities:
  Net income                          $  8,887,357   $  6,656,937   $  9,017,840
- --------------------------------------------------------------------------------
  Adjustments to reconcile net
       income to net cash provided by
       operating activities:
    Depreciation and amortization          838,805        936,373        520,675
    Realized investment (gains) losses    (170,852)        38,702         13,562
  Changes in Assets and Liabilities,
       net of acquisition:
    Losses and loss expenses            13,920,129      8,570,133      7,125,806
    Unearned premiums                    9,499,675      2,934,235      6,478,435
    Accrued expenses                      (165,997)     1,066,798       (542,693)
    Premiums receivable                 (3,261,533)     1,606,369     (1,253,529)
    Deferred policy acquisition costs     (294,776)       130,999       (399,428)
    Deferred income taxes                  491,799     (3,790,122)       158,593
    Reinsurance receivable             (10,083,481)    (4,731,060)    (6,182,621)
    Accrued investment income             (452,173)      (309,831)      (186,170)
    Amounts due to/from affiliate          350,639     (1,133,037)    (4,180,378)
    Reinsurance balances payable             9,862       (569,880)      (127,931)
    Prepaid reinsurance premiums        (4,852,750)    (4,951,726)    (3,819,226)
    Current income taxes                   476,788       (471,128)      (171,387)
    Change in pooling participation      3,322,031             --             --
    Other, net                             357,599        519,441        100,292
- --------------------------------------------------------------------------------
      Net adjustments                    9,985,765       (153,734)    (2,466,000)
- --------------------------------------------------------------------------------
    Net cash provided by operating
       activities                       18,873,122      6,503,203      6,551,840
- --------------------------------------------------------------------------------

Cash Flows from Investing Activities:
  Purchase of fixed maturities
    Held to maturity                   (16,938,751)   (23,132,805)   (24,774,417)
    Available for sale                 (29,855,234)   (32,233,424)   (43,662,157)
  Purchase of equity securities        (28,286,533)   (14,258,861)   (15,824,465)
  Sale of fixed maturities
    Available for sale                   8,719,165        503,895      2,207,500
  Maturity of fixed maturities
    Held to maturity                    12,790,715     14,393,638     24,815,155
    Available for sale                  11,623,622     19,049,880     16,106,644
  Sale of equity securities             24,572,288     11,767,268     16,155,130
  Sale of Atlantic Insurance
       Services, net                            --        (48,810)            --
  Acquisition of Southern Heritage              --             --    (18,028,072)
  Purchase of property and equipment      (275,982)      (443,498)      (650,014)
  Net sales (purchases) of
       short-term investments           (2,588,599)    14,526,630     15,099,631
- --------------------------------------------------------------------------------
    Net cash used in investing
       activities                      (20,239,309)    (9,876,087)   (28,555,065)
- --------------------------------------------------------------------------------

Cash Flows from Financing Activities:
  Issuance of common stock               2,756,540      2,514,415      2,480,747
  Borrowings (payments) under line
       of credit, net                    3,000,000       (500,000)    27,000,000
  Cash dividends paid                   (3,126,959)    (2,946,170)    (2,663,795)
- --------------------------------------------------------------------------------
  Net cash provided by (used in)
       financing activities              2,629,581       (931,755)    26,816,952
- --------------------------------------------------------------------------------
Net increase (decrease) in cash          1,263,394     (4,304,639)     4,813,727
Cash at beginning of year                3,922,403      8,227,042      3,413,315
- --------------------------------------------------------------------------------
Cash at end of year                   $  5,185,797   $  3,922,403   $  8,227,042
================================================================================

See accompanying notes to consolidated financial statements.

                               p a g e  1 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Donegal Group Inc. (the "Company") was organized as a regional
insurance holding company by Donegal Mutual Insurance Company (the "Mutual
Company") and operates in the Mid-Atlantic and Southern states through its
wholly owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Insurance Company of Virginia ("Southern"),
Southern Heritage Insurance Company ("Southern Heritage"), Delaware
Atlantic Insurance Company ("Delaware"), and Pioneer Insurance Company of
Ohio ("Pioneer-Ohio") (collectively "Insurance Subsidiaries").  The Company
has three operating segments:  the investment function, the personal lines
of insurance and the commercial lines of insurance.  Products offered in
the personal lines of insurance consist primarily of homeowners and private
passenger automobile policies.  Products offered in the commercial lines of
insurance consist primarily of commercial automobile, commercial multiple
peril and workers' compensation policies.  The Insurance Subsidiaries are
subject to regulation by Insurance Departments in those states in which
they operate and undergo periodic examination by those departments.  The
Insurance Subsidiaries are also subject to competition from other insurance
carriers in their operating areas.  Atlantic States participates in an
intercompany pooling arrangement with the Mutual Company and assumes 70% of
the pooled business (65% prior to July 1, 2000).  Southern cedes 50% of its
business to the Mutual Company and prior to January 1, 2000, Delaware ceded
70% of its workers' compensation business to the Mutual Company.  At
December 31, 2000, the Mutual Company held 62% of the outstanding common
stock of the Company.

    In addition to the Company's Insurance Subsidiaries, it also owned all
of the outstanding stock of Atlantic Insurance Services, Inc.  ("AIS"), an
insurance services organization.  The Company sold all of the stock of AIS
on October 1, 1999.

    During 2000, the Company acquired 45% of the outstanding stock of
Donegal Financial Services Corporation ("DFSC"), a bank holding company,
for $3,042,000 in cash.  The remaining 55% of the outstanding stock of DFSC
is owned by the Mutual Company.

    On January 3, 2001, the Company announced that it had purchased all of
the outstanding shares of Pioneer Insurance Company of New York
("Pioneer-NY") from the Mutual Company effective January 1, 2001.  The
purchase price was $4,441,311, representing Pioneer-NY's adjusted statutory
equity at December 31, 2000.  The acquisition will be accounted for as a
pooling of interests.

BASIS OF CONSOLIDATION

The consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States of America, include the accounts of Donegal Group Inc. and its
wholly owned subsidiaries.  All significant inter-company accounts and
transactions have been eliminated in consolidation.  The term "Company" as
used herein refers to the consolidated entity.

USE OF ESTIMATES

In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period.  Actual results could differ significantly
from those estimates.

    Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the liabilities for
losses and loss expenses.  While management uses available information to
provide for such liabilities, future changes to these liabilities may be
necessary based on changes in trends in claim frequency and severity.

INVESTMENTS

    The Company classifies its debt and equity securities into the
following categories:

    Held to Maturity -- Debt securities that the Company has the positive
    intent and ability to hold to maturity; reported at amortized cost.

    Available for Sale -- Debt and equity securities not classified as held
    to maturity; reported at fair value, with unrealized gains and losses
    excluded from income and reported as a separate component of stockholders'
    equity (net of tax effects).

    Short-term investments are carried at amortized cost, which
approximates fair value.

    If there is a decline in fair value below amortized cost which is other
than temporary, the cost basis for such investments in the held to maturity
and available for sale categories is reduced to fair value.  Such decline
in cost basis is recognized as a realized loss and charged to income.

    Premiums and discounts on debt securities are amortized over the life
of the security as an adjustment to yield using the effective interest
method.  Realized investment gains and losses are computed using the
specific identification method.

    Premiums and discounts for mortgage-backed debt securities are
amortized using anticipated prepayments.

                               p a g e  1 7

FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company has used the following methods and assumptions in
estimating its fair value disclosures:

    Investments -- Fair values for fixed maturity securities are based on
    quoted market prices, when available.  If quoted market prices are not
    available, fair values are based on quoted market prices of comparable
    instruments or values obtained from independent pricing services through a
    bank trustee.  The fair values for equity securities are based on quoted
    market prices.

    Cash and Short-Term Investments -- The carrying amounts reported in the
    balance sheet for these instruments approximate their fair values.

    Premium and Reinsurance Receivables and Payables -- The carrying
    amounts reported in the balance sheet for these instruments approximate
    their fair values.

    Borrowings Under Line of Credit -- The carrying amounts reported in the
    balance sheet for the line of credit approximate fair value due to the
    variable rate nature of the line of credit.

REVENUE RECOGNITION

Insurance premiums are recognized as income over the terms of the
policies.  Unearned premiums are calculated on a daily pro-rata basis.

POLICY ACQUISITION COSTS

Policy acquisition costs, consisting primarily of commissions, premium
taxes and certain other variable underwriting costs, are deferred and
amortized over the period in which the premiums are earned.  Anticipated
losses and loss expenses, expenses for maintenance of policies in force and
anticipated investment income are considered in the determination of the
recoverability of deferred acquisition costs.

PROPERTY AND EQUIPMENT

Property and equipment are reported at depreciated cost that is
computed using the straight-line method based upon estimated useful lives
of the assets.

LOSSES AND LOSS EXPENSES

The liability for losses and loss expenses includes amounts determined
on the basis of estimates for losses reported prior to the close of the
accounting period and other estimates, including those for incurred but not
reported losses and salvage and subrogation recoveries.

    These liabilities are continuously reviewed and updated by management,
and management believes that such liabilities are adequate to cover the
ultimate net cost of claims and expenses.  When management determines that
changes in estimates are required, such changes are included in current
earnings.

    The Company has no material exposures to environmental liabilities.

INCOME TAXES

The Company and its subsidiaries currently file a consolidated federal
income tax return.

    The Company accounts for income taxes using the asset and liability
method.  The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled.

CREDIT RISK

The Company provides property and liability coverages through its
Insurance Subsidiaries' independent agency systems located throughout its
operating area.  The majority of this business is billed directly to the
insured, although a portion of the Company's commercial business is billed
through its agents, who are extended credit in the normal course of
business.

    The Company's Insurance Subsidiaries have reinsurance agreements in
place with the Mutual Company and with a number of other authorized
reinsurers with at least an A.M.  Best rating of A- or an equivalent
financial condition.

REINSURANCE ACCOUNTING AND REPORTING

The Company relies upon reinsurance agreements to limit its maximum net
loss from large single risks or risks in concentrated areas, and to
increase its capacity to write insurance.  Reinsurance does not relieve the
primary insurer from liability to its policyholders.  To the extent that a
reinsurer may be unable to pay losses for which it is liable under the
terms of a reinsurance agreement, the Company is exposed to the risk of
continued liability for such losses.  However, in an effort to reduce the
risk of non-payment, the Company requires all of its reinsurers to have an
A.M. Best rating of A- or better or, with respect to foreign reinsurers,
to have a financial condition which, in the opinion of management, is
equivalent to a company with at least an A- rating.

                               p a g e  1 8

STOCK-BASED COMPENSATION

Effective July 1, 2000, the Company adopted Financial Accounting
Standards Board Interpretation No. 44 (FIN No. 44), "Accounting for Certain
Transactions involving Stock Compensation," and Emerging Issues Task Force
Issue No. 00-23 (EITF 00-23), "Issues Related to the Accounting for Stock
Compensation under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and FIN No. 44, Accounting for
Certain Transactions involving Stock Compensation."  FIN No. 44 states that
APB Opinion No. 25 does not apply in the separate financial statements of a
subsidiary to the accounting for stock compensation granted by the
subsidiary to employees of the parent or another subsidiary.  EITF 00-23
states that when employees of a controlling entity are granted stock
compensation, the entity granting the stock compensation should measure the
fair value of the award at the grant date and recognize that fair value as
a dividend to the controlling entity.  These provisions apply to the
Company, as the Mutual Company is the employer of record for all employees
that provide services to the Company.

    Prior to July 1, 2000, the Company's stock-based compensation plans
were accounted for under the provisions of APB Opinion No. 25 and related
interpretations.  As such, compensation expense was recorded on the date of
stock option grant only if the current market price of the underlying stock
exceeded the exercise price.  Additionally, the Company provides the
pro-forma net income and earnings per share disclosures required by
Statement of Financial Accounting Standards (SFAS No. 123), "Accounting for
Stock-Based Compensation," for grants prior to the adoption of FIN No. 44.

EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding for the period, while
diluted earnings per share reflects the dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock.

2--ACQUISITIONS OF BUSINESSES

In November 1998, the Company acquired all of the outstanding stock of
Southern Heritage for a cash price of $18,824,950.  Southern Heritage
primarily writes personal automobile and homeowners policies in the
Southeastern region of the country.  This transaction was accounted for as
a "purchase."  The Company's financial statements include Southern Heritage
as a consolidated subsidiary from November 1, 1998.

    Assets in the amount of $56,568,710 were acquired, and liabilities in
the amount of $38,330,912 were assumed in the purchase transaction.  The
purchase price exceeded the fair value of net assets acquired by $587,152,
which was recognized as goodwill and is being amortized over five years.

    On January 3, 2001, the Company announced that it had purchased all of
the outstanding shares of Pioneer-NY from the Mutual Company effective
January 1, 2001.  The purchase price was $4,441,311, representing
Pioneer-NY's adjusted statutory equity at December 31, 2000.  The
acquisition will be accounted for as a pooling of interests.  The pro-forma
impact of this acquisition on 2000 premiums, net income and earnings per
share was not considered to be material.

3--TRANSACTIONS WITH AFFILIATES

    The Company conducts business and has various agreements with the
Mutual Company which are described below:

A. REINSURANCE POOLING AND OTHER REINSURANCE ARRANGEMENTS

Atlantic States cedes to the Mutual Company all of its insurance
business and assumes from the Mutual Company 70% (65% prior to July 1,
2000) of the Mutual Company's total pooled insurance business, including
that assumed from Atlantic States and substantially all of the business
assumed and retained by the Mutual Company from Southern and Delaware
(prior to January 1, 2000).  Atlantic States, Southern, Delaware,
Pioneer-Ohio and Southern Heritage each have a catastrophe reinsurance
agreement with the Mutual Company which limits the maximum liability under
any one catastrophic occurrence to $400,000, $300,000, $300,000, $200,000
and $400,000 (effective January 1, 2000) respectively, and $1,000,000
($700,000 in 1999 and 1998) for a catastrophe involving more than one of
the companies.  The Mutual Company and Delaware have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $200,000 of
losses in excess of $50,000 and prior to January 1, 2000, a workers'
compensation quota share agreement whereby Delaware ceded 70% of that
business.  The Mutual Company and Pioneer-Ohio have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $200,000 of
losses in excess of $50,000.  The Mutual Company and Pioneer-Ohio also had
an aggregate excess of loss reinsurance agreement, entered into as part of
the sale of Pioneer-Ohio from the Mutual Company to Donegal Group Inc., in
which the Mutual Company agreed to assume the adverse loss development of
claims with dates of loss prior to December 31, 1996, as developed through
December 31, 1998, and to assume losses in excess of a 60% loss ratio
through December 31, 1998.  The Mutual Company and Southern have an excess
of loss reinsurance agreement in which the Mutual Company assumes up to
$25,000 of losses in excess of $100,000 and a quota share agreement whereby
Southern cedes 50% of its direct business less certain reinsurance to the
Mutual Company.  Effective October 1, 2000, the Mutual Company and Southern
Heritage have an excess of loss reinsurance agreement in which the Mutual
Company assumes up to $125,000 of losses in excess of $125,000.  Southern,
Delaware and Pioneer-Ohio each have retrocessional reinsurance agreements
with the Mutual Company under which they cede, and then assume back, 100%
of their business net of other reinsurance.

                               p a g e  1 9

    The following amounts represent reinsurance transactions with the
Mutual Company during 2000, 1999 and 1998:

CEDED REINSURANCE:                 2000              1999              1998
- ------------------------------------------------------------------------------
Premiums written              $ 74,847,463      $ 66,090,699      $ 55,372,556
==============================================================================
Premiums earned               $ 70,072,022      $ 60,977,975      $ 51,617,429
==============================================================================
Losses and loss expenses      $ 51,661,595      $ 41,775,579      $ 32,791,739
==============================================================================
Unearned premiums             $ 35,774,818      $ 30,999,377      $ 25,886,653
==============================================================================
Liability for losses and
  loss expenses               $ 54,962,818      $ 43,907,885      $ 39,039,648
==============================================================================

ASSUMED REINSURANCE:
- ------------------------------------------------------------------------------
Premiums written              $142,324,929      $124,433,678      $114,667,549
==============================================================================
Premiums earned               $132,195,646      $119,364,863      $111,333,956
==============================================================================
Losses and loss expenses      $ 89,152,108      $ 80,325,374      $ 69,869,999
==============================================================================
Unearned premiums             $ 67,017,098      $ 56,887,815      $ 51,819,000
==============================================================================
Liability for losses
  and loss expenses           $ 96,462,837      $ 90,397,135      $ 85,766,514
==============================================================================

    Losses and loss expenses assumed from the Mutual Company for 2000, 1999
and 1998 are reported net of inter-company catastrophe recoveries which
amounted to approximately $0.4 million, $2.0 million, and $2.3 million,
respectively.

B. EXPENSE SHARING

The Mutual Company provides facilities, management and other services
to the Company, and the Company reimburses the Mutual Company for such
services on a periodic basis under usage agreements and pooling
arrangements.  The charges are based upon the relative participation of the
Company and the Mutual Company in the pooling arrangement, and management
of both the Company and the Mutual Company consider this allocation to be
reasonable.  Charges for these services totalled $26,677,399, $27,466,898
and $25,250,873 for 2000, 1999 and 1998, respectively.

C. LEASE AGREEMENT

The Company leases office equipment and automobiles to the Mutual
Company under a 10-year lease dated January 1, 2000.

D. WORKERS' COMPENSATION AGREEMENTS

The Mutual Company has agreements in place with Delaware, Southern and
Pioneer-Ohio to reallocate the loss results of workers' compensation
business written by those companies as part of commercial accounts
primarily written by the Mutual Company or Atlantic States.  These
agreements provide for the workers' compensation loss ratios of each
company to be no worse than the average workers' compensation loss ratio
for all of the companies combined.

E. LEGAL SERVICES

Donald H. Nikolaus, President and a director of the Company, is also a
partner in the law firm of Nikolaus & Hohenadel.  Such firm has served as
general counsel to the Company since 1986, principally in connection with
the defense of claims litigation arising in Lancaster, Dauphin and York
counties.  Such firm is paid its customary fees for such services.

4--INVESTMENTS

The amortized cost and estimated fair values of fixed maturities and
equity securities at December 31, 2000 and 1999, are as follows:

                                      2000
- --------------------------------------------------------------------------------
                                           Gross          Gross      Estimated
                          Amortized     Unrealized     Unrealized      Fair
HELD TO MATURITY             Cost          Gains         Losses        Value
- --------------------------------------------------------------------------------
                                                        
U.S. Treasury securities
  and obligations of
  U.S. government
  corporations
  and agencies          $ 37,072,395    $  319,061    $  251,956    $ 37,139,500
Canadian government
  obligation                 498,559        11,441            --         510,000
Obligations of states
  and political
  subdivisions            66,831,090     1,499,955        45,904      68,285,141
Corporate securities      21,319,759       221,564       195,287      21,346,036
Mortgage-backed
  securities              14,301,367        47,120       140,228      14,208,259
- --------------------------------------------------------------------------------
  Totals                $140,023,170    $2,099,141    $  633,375    $141,488,936
================================================================================

                                      2000
- --------------------------------------------------------------------------------
                                           Gross          Gross      Estimated
                          Amortized     Unrealized     Unrealized      Fair
AVAILABLE FOR SALE           Cost          Gains         Losses        Value
- --------------------------------------------------------------------------------
                                                        
U.S. Treasury securities
  and obligations of
  U.S. government
  corporations
  and agencies          $ 66,796,158    $  536,019    $  645,247    $ 66,686,930
Obligations of states
  and political
  subdivisions            17,766,511       326,924        36,885      18,056,550
Corporate securities      22,702,528       312,426       304,604      22,710,350
Mortgage-backed
  securities               4,640,651         9,790       113,588       4,536,853
Equity securities         12,476,948       845,004     1,268,741      12,053,211
- --------------------------------------------------------------------------------
  Totals                $124,382,796    $2,030,163    $2,369,065    $124,043,894
================================================================================

                                      1999
- --------------------------------------------------------------------------------
                                           Gross          Gross      Estimated
                          Amortized     Unrealized     Unrealized      Fair
HELD TO MATURITY             Cost          Gains         Losses        Value
- --------------------------------------------------------------------------------
                                                        
U.S. Treasury securities
  and obligations of
  U.S. government
  corporations
  and agencies          $ 36,860,655    $   34,292    $1,219,840    $ 35,675,107
Canadian government
  obligation                 498,245            --         8,245         490,000
Obligations of states
  and political
  subdivisions            67,823,291       819,155     1,005,936      67,636,510
Corporate securities      15,819,143        73,228       639,010      15,253,361
Mortgage-backed
  securities              15,172,213        30,077       261,274      14,941,916
- --------------------------------------------------------------------------------
  Totals                $136,173,547    $  956,752    $3,134,305    $133,995,994
================================================================================

                               p a g e  2 0

                                      1999
- --------------------------------------------------------------------------------
                                           Gross          Gross      Estimated
                          Amortized     Unrealized     Unrealized      Fair
AVAILABLE FOR SALE           Cost          Gains         Losses        Value
- --------------------------------------------------------------------------------
                                                        
U.S. Treasury securities
  and obligations of
  U.S. government
  corporations
  and agencies          $ 63,645,993    $    1,982    $2,443,578    $ 61,204,397
Obligations of states
  and political
  subdivisions            20,524,977       204,284       506,415      20,222,846
Corporate securities      15,472,456           578       419,871      15,053,163
Mortgage-backed
  securities               3,776,568           321       213,747       3,563,142
Equity securities          9,043,818     1,384,882     1,199,202       9,229,498
- --------------------------------------------------------------------------------
  Totals                $112,463,812    $1,592,047    $4,782,813    $109,273,046
================================================================================

    The amortized cost and estimated fair value of fixed maturities at
December 31, 2000, by contractual maturity, are shown below.  Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.

- --------------------------------------------------------------------------------
                                                                      Estimated
                                                  Amortized              Fair
                                                     Cost               Value
- --------------------------------------------------------------------------------
                                                              
HELD TO MATURITY
Due in one year or less                         $  6,905,865        $  6,965,000
Due after one year through five years             35,501,879          35,811,000
Due after five years through ten years            71,017,355          72,274,485
Due after ten years                               12,296,704          12,230,192
Mortgage-backed securities                        14,301,367          14,208,259
- --------------------------------------------------------------------------------
  Total held to maturity                        $140,023,170        $141,488,936
================================================================================
AVAILABLE FOR SALE
Due in one year or less                         $ 10,385,517        $ 10,385,000
Due after one year through five years             39,390,838          39,599,950
Due after five years through ten years            40,768,456          41,176,880
Due after ten years                               16,720,386          16,292,000
Mortgage-backed securities                         4,640,651           4,536,853
- --------------------------------------------------------------------------------
  Total available for sale                      $111,905,848        $111,990,683
================================================================================

    The amortized cost of fixed maturities on deposit with various
regulatory authorities at December 31, 2000 and 1999, amounted to
$5,532,145 and $5,655,877, respectively.

    Net investment income of the Company, consisting primarily of interest
and dividends, is attributable to the following sources:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Fixed maturities                $14,849,555       $12,738,765       $ 10,981,353
Equity securities                   634,403           439,660            294,646
Short-term investments            1,174,926           770,562          1,385,500
Real estate                         175,250           236,139            175,250
- --------------------------------------------------------------------------------
Investment income                16,834,134        14,185,126         12,836,749
Investment expenses                 841,639           961,589            839,088
- --------------------------------------------------------------------------------
Net investment income           $15,992,495       $13,223,537       $ 11,997,661
================================================================================

    Gross realized gains and losses from investments and the change in the
difference between fair value and cost of investments, before applicable
income taxes, are as follows:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Gross realized gains:
  Fixed maturities              $    237,748      $         --      $   132,431
  Equity securities                1,813,242           586,745        1,119,679
- --------------------------------------------------------------------------------
                                   2,050,990           586,745        1,252,110
- --------------------------------------------------------------------------------
Gross realized losses:
  Fixed maturities                    20,597             6,083            5,180
  Equity securities                1,859,541           619,364        1,260,492
- --------------------------------------------------------------------------------
                                   1,880,138           625,447        1,265,672
- --------------------------------------------------------------------------------
Net realized gains (losses)     $    170,852      $    (38,702)     $   (13,562)
================================================================================
Change in difference between
  fair value and cost of
  investments:
  Fixed maturities              $  7,104,600      $(11,439,370)     $ 1,439,782
  Equity securities                 (609,417)         (371,528)        (166,335)
- --------------------------------------------------------------------------------
                                $  6,495,183      $(11,810,898)     $ 1,273,447
================================================================================

    Income taxes (benefits) on realized investment gains were $58,090,
$(13,159), and $(4,611) for 2000, 1999 and 1998, respectively.  Deferred
income tax benefits applicable to net unrealized investment losses included
in shareholders' equity were $115,227 and $1,116,777 at December 31, 2000
and 1999, respectively.

    During 2000, certain investments trading below cost had declined on an
other-than- temporary basis.  Losses of $436,943 were included in net
realized investment gains for these investments in 2000.

    Donegal Group has not held or issued derivative financial instruments.

5--DEFERRED POLICY ACQUISITION COSTS

Changes in deferred policy acquisition costs are as follows:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Balance, January 1              $ 11,203,302      $ 11,334,301      $ 8,448,060
Acquisition of
  Southern Heritage                       --                --        2,486,813
Acquisition costs deferred        25,741,955        24,477,001       19,889,428
Amortization charged
  to earnings                     24,925,000        24,608,000       19,490,000
- --------------------------------------------------------------------------------
Balance, December 31            $ 12,020,257      $ 11,203,302      $11,334,301
================================================================================

6-PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2000 and 1999, consisted of the
following:

- --------------------------------------------------------------------------------
                                                                     Estimated
                                                                       Useful
                                    2000              1999              Life
- --------------------------------------------------------------------------------
                                                          
Cost -- office equipment        $  4,731,613      $  4,615,884      5-15 years
        automobiles                  938,958           958,313         3 years
        real estate                2,627,599         2,627,599     15-50 years
        software                     325,323           315,973         5 years
- --------------------------------------------------------------------------------
                                   8,623,493         8,517,769
Accumulated depreciation          (3,606,829)       (3,001,081)
- --------------------------------------------------------------------------------
                                $  5,016,664      $  5,516,688
================================================================================

    Depreciation expense for 2000, 1999, and 1998 amounted to $776,006,
$847,228 and $559,710, respectively.

                               p a g e  2 1

7--LIABILITY FOR LOSSES AND LOSS EXPENSES

Activity in the liability for losses and loss expenses is summarized as
follows:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Balance at January 1            $149,979,141      $141,409,008      $118,112,390
  Less reinsurance
    recoverable                   52,485,149        47,545,592        40,638,565
- --------------------------------------------------------------------------------
Net balance at January 1          97,493,992        93,863,416        77,473,825
  Acquisition of
    Southern Heritage                     --                --        14,967,242
- --------------------------------------------------------------------------------
New balance at beginning
  as adjusted                     97,493,992        93,863,416        92,441,067
- --------------------------------------------------------------------------------
Incurred related to:
  Current year                   102,222,144        99,659,002        75,463,085
  Prior years                        919,761          (454,000)       (2,296,000)
- --------------------------------------------------------------------------------
Total incurred                   103,141,905        99,205,002        73,167,085
- --------------------------------------------------------------------------------
Paid related to:
  Current year                    60,865,275        58,906,426        44,388,736
  Prior years                     38,477,111        36,668,000        27,356,000
- --------------------------------------------------------------------------------
Total paid                        99,342,386        95,574,426        71,744,736
- --------------------------------------------------------------------------------
Net balance at
     December 31                 101,293,511        97,493,992        93,863,416
  Plus reinsurance
    recoverable                   62,605,759        52,485,149        47,545,592
- --------------------------------------------------------------------------------
Balance at December 31          $163,899,270      $149,979,141      $141,409,008
================================================================================

    The Company recognized an increase (decrease) in the liability for
losses and loss expenses of prior years of $0.9 million, $(0.5 million) and
$(2.3 million) in 2000, 1999 and 1998, respectively.  These developments
are primarily attributable to variations from expected claim severity in
the private passenger automobile liability, workers' compensation and
commercial multiple peril lines of business.

8--LINE OF CREDIT

At December 31, 2000 and 1999, pursuant to a credit agreement dated
December 29, 1995, and amended as of July 27, 1998, with Fleet National
Bank, the Company had unsecured borrowings of $40 million and $37 million,
respectively.  Such borrowings were made in connection with the
acquisitions of Delaware, Pioneer-Ohio, and Southern Heritage and various
capital contributions to the subsidiaries.  Per the terms of the credit
agreement, the Company may borrow up to $40 million at interest rates equal
to the bank's then current prime rate or the then current London interbank
Eurodollar bank rate plus 1.70%.  At December 31, 2000, the interest rates
were 9.5% on an outstanding prime rate balance of $3 million, 8.48% on an
outstanding Eurodollar rate balance of $15 million and 8.50188% on another
Eurodollar rate balance of $22 million.  In addition, the Company pays a
rate of 3/10 of 1% per annum on the average daily unused portion of the
bank's commitment.  On each July 27, commencing July 27, 2001, the credit
line will be reduced by $8 million.  Any outstanding loan in excess of the
remaining credit line, after such reduction, will then be payable.

9--UNAFFILIATED REINSURERS

In addition to the primary reinsurance in place with the Mutual
Company, the Insurance Subsidiaries have other reinsurance in place,
principally with four unaffiliated reinsurers.  The following amounts
represent reinsurance transactions with unaffiliated reinsurers during
2000, 1999 and 1998:

Ceded reinsurance:                  2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Premiums written              $ 5,790,027         $ 6,348,846       $ 4,784,768
================================================================================
Premiums earned               $ 5,712,718         $ 6,509,844       $ 4,720,669
================================================================================
Losses and loss expenses      $ 2,931,290         $ 4,513,244       $ 4,489,728
================================================================================
Unearned premiums             $ 1,232,769         $ 1,155,460       $ 1,316,458
================================================================================
Liability for losses and
  loss expenses               $ 7,642,941         $ 8,577,264       $ 8,505,944
================================================================================

10--INCOME TAXES

The provision for income tax consists of the following:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Current                         $ 2,444,119       $   762,286       $ 2,500,582
Deferred                            491,799        (3,790,122)          158,593
- --------------------------------------------------------------------------------
Federal tax provision           $ 2,935,918       $(3,027,836)      $ 2,659,175
================================================================================

    The effective tax rate is different than the amount computed at the
statutory federal rate of 34% for 2000, 1999 and 1998.  The reason for such
difference and the related tax effect are as follows:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Income before
  income taxes                  $11,823,275       $ 3,629,101       $11,677,015
================================================================================
Computed "expected"
  taxes at 34%                    4,019,914         1,233,894       $ 3,970,185
Recognition of net operating
  loss carryover of
  Southern Heritage                      --        (3,004,524)               --
Tax-exempt interest              (1,344,933)       (1,352,657)       (1,180,773)
Dividends received deduction        (25,423)          (83,948)         (177,374)
Other, net                          286,360           179,399            47,137
- --------------------------------------------------------------------------------
Federal income
  tax provision                 $ 2,935,918       $(3,027,836)      $ 2,659,175
================================================================================

                               p a g e  2 2

    The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999, are as follows:

                                                      2000               1999
- --------------------------------------------------------------------------------
                                                              
Deferred tax assets:
  Unearned premium                                $ 5,050,224       $ 4,454,147
  Loss reserves                                     4,817,874         4,666,536
  AMT credit carryforward                                  --           577,611
  Net operating loss carryforward -
    Southern Heritage                               2,339,133         2,646,172
  Unrealized loss                                     115,227         1,116,777
  Other                                               174,886           306,412
- --------------------------------------------------------------------------------
    Total                                         $12,497,344       $13,767,655
================================================================================
Deferred tax liabilities:
  Depreciation expense                            $   473,867       $   469,426
  Deferred policy acquisition costs                 4,086,887         3,809,123
  Salvage recoverable                                 308,707           367,874
- --------------------------------------------------------------------------------
    Total                                         $ 4,869,461       $ 4,646,423
================================================================================
    Net deferred tax assets                       $ 7,627,883       $ 9,121,232
================================================================================

    A valuation allowance is provided when it is more likely than not that
some portion of the tax asset will not be realized.  Management has
determined that it is not required to establish a valuation allowance for
any deferred tax asset at December 31, 2000, since it is more likely than
not that the deferred tax assets will be realized through reversals of
existing temporary differences, future taxable income, carryback to taxable
income in prior years and the implementation of tax planning strategies.

    A change in the federal income laws was enacted during 1999 which
allows net operating loss carryforwards of an acquired company to be used
to offset future taxable income of other affiliated companies filing as
part of a consolidated tax return.  Prior law allowed such net operating
loss carryforward to be used to offset taxable income of the acquired
company only.  Due to this law change, the net operating loss carryforward,
obtained as part of the acquisition of Southern Heritage, can now be used
to offset taxable income generated by the other consolidated affiliates.
This was the primary factor in management's determination that no valuation
allowance was required at the end of 1999.  Accordingly, the tax benefit of
this carryforward, as adjusted for the 1998 tax return as filed, of
$3,004,524 was recognized in 1999.

    At December 31, 2000, the Company has a net operating loss carryforward
of $6,879,803, which is available to offset taxable income of the Company.
Such net operating loss carryforward will expire beginning in 2009.
Federal income tax laws limit the amount of net operating loss carryforward
that the Company can use in any one year to approximately $1 million.

11--STOCK COMPENSATION PLANS

EQUITY INCENTIVE PLANS

The Company has had an Equity Incentive Plan for key employees since
1986 and adopted a nearly identical new plan in 1996.  Both plans provide
for the granting of awards by the Board of Directors in the form of stock
options, stock appreciation rights, restricted stock or any combination of
the above.  The new plan was adopted in 1996 and amended in 1997 and 1999
making a total of 1,800,000 shares available.  The plans provide that stock
options may become exercisable up to 10 years from date of grant, with an
option price not less than fair market value on date of grant.  The stock
appreciation rights permit surrender of the option and receipt of the
excess of current market price over option price in cash.  No stock
appreciation rights have been issued.

    During 1996 the Company adopted an Equity Incentive Plan For Directors.
The plan was amended in 1998, making 265,735 shares available for award.
Awards may be made in the form of stock options, and the plan additionally
provides for the issuance of 177 shares of restricted stock to each
director on the first business day of January in each year, commencing
January 2, 1997.  As of December 31, 2000, the Company has 71,112
unexercised options under this plan.  Additionally 1,947, 2,124 and 2,124
shares of restricted stock were issued on January 2, 2000, 1999 and 1998,
respectively.

    Information regarding activity in the Company's stock option plans is
presented below:

                                                          Weighted-Average
                                               Number of   Exercise Price
                                                Options       Per Share
- --------------------------------------------------------------------------
Outstanding at December 31, 1997                595,860        $13.50
  Granted - 1998                                505,333         18.00
  Exercised - 1998                               10,073         13.50
  Forfeited - 1998                                   --            --
- --------------------------------------------------------------------------
Outstanding at December 31, 1998              1,091,120         15.73
  Granted - 1999                                433,500          8.00
  Exercised - 1999                                   --            --
  Forfeited - 1999                               28,227         15.52
- --------------------------------------------------------------------------
Outstanding at December 31, 1999              1,496,393         13.50
  Granted - 2000                                 59,500          8.05
  Exercised - 2000                                   --            --
  Forfeited - 2000                               39,555         12.84
- --------------------------------------------------------------------------
Outstanding at December 31, 2000              1,516,338        $13.19
==========================================================================
Exercisable at:
  December 31, 1998                             556,301        $14.86
==========================================================================
  December 31, 1999                             897,338        $15.99
==========================================================================
  December 31, 2000                           1,190,004        $16.68
==========================================================================

Options available for future grants at December 31, 2000 are 549,397.

    The following table summarizes information about fixed stock options at
December 31, 2000:

                                                Exercise Prices
                              -------------------------------------------------
                                  $8.00        $9.00       $13.50        $18.00
- -------------------------------------------------------------------------------
Options outstanding at
  December 31, 2000:
  Number of options             471,000        3,000      552,004       490,334
- -------------------------------------------------------------------------------
Weighted-average remaining
  contractual life            4.0 years    5.0 years    1.0 years    2.25 years
- -------------------------------------------------------------------------------
Options exercisable at
  December 31, 2000:
  Number of options             151,000           --      552,004       487,000
- -------------------------------------------------------------------------------

                               p a g e  2 3

EMPLOYEE STOCK PURCHASE PLANS

During 1996 the Company adopted an Employee Stock Purchase Plan which
made 162,873 shares available for issuance.

    The plan extends over a 10-year period and provides for shares to be
offered to all eligible employees at a purchase price equal to the lesser
of 85% of the fair market value of the Company's common stock on the last
day before the first day of the enrollment period (June 1 and December 1)
of the plan or 85% of the fair market value of the Company's common stock
on the last day of the subscription period (June 30 and December 31).  A
summary of plan activity follows:

                                         Shares Issued
                                 ---------------------------
                                     Price          Shares
- ------------------------------------------------------------
January 1, 1998                    $11.65430         8,901
July 1, 1998                       $13.06875         9,179
January 1, 1999                    $13.28125        10,227
July 1, 1999                       $ 9.66875        11,876
January 1, 2000                    $ 5.41875        23,906
July 1, 2000                       $ 4.88750        21,714

    On January 1, 2001, the Company issued an additional 16,438 shares at a
price of $5.95 per share under this plan.

AGENCY STOCK PURCHASE PLAN

On December 31, 1996, the Company adopted the Agency Stock Purchase
Plan which made 514,102 shares available for issuance.  The plan provides
for agents of affiliated companies of Donegal Group Inc. to invest up to
$12,000 per subscription period (April 1 to September 30 and October 1 to
March 31) under various methods.  Stock is issued at the end of the
subscription period at a price equal to 90% of the average market price
during the last ten trading days of the subscription period.  During 2000,
1999 and 1998, 46,603, 47,841, and 35,003 shares, respectively, were issued
under this plan.  Expense recognized under the plan was not material.

PRO-FORMA DISCLOSURES

The weighted-average grant date fair value of options granted for the
various plans during 2000, 1999 and 1998 was $2.23, $1.98 and $4.48,
respectively.

    The fair values above were calculated based upon risk-free interest
rates of 5.75% for the Stock Purchase Plans and the Equity Incentive Plans,
expected lives of 6 months for the Stock Purchase Plans and 5 years for the
Equity Incentive Plans, expected volatility of 54% for 2000, 47% for 1999
and 34% for 1998, and an expected dividend yield of 4.5% for 2000, 5.0% for
1999 and 2.4% for 1998.

    Through June 30, 2000, the Company applied APB Opinion No. 25 in
accounting for its stock-based compensation plans.  Accordingly, no
compensation cost has been recognized for its fixed stock option plans and
certain of its stock purchase plans.  Had the Company recognized stock
compensation expense in accordance with SFAS No. 123, net income and
earnings per share would have been reduced to the pro-forma amounts shown
below:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Net income:
  As reported                   $8,887,357        $6,656,937        $9,017,840
  Pro-forma                      8,122,402         5,457,591         8,362,764
Basic earnings per share:
  As reported                         1.02               .80              1.11
  Pro-forma                            .93               .66              1.03
Diluted earnings per share:
  As reported                         1.02               .80              1.09
  Pro-forma                            .93               .66              1.01

12--STATUTORY NET INCOME, CAPITAL AND SURPLUS
    AND DIVIDEND RESTRICTIONS

    The following is selected information, as filed with insurance
regulatory authorities, for the Insurance Subsidiaries as determined in
accordance with accounting practices prescribed or permitted by such
insurance regulatory authorities:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
ATLANTIC STATES

Statutory capital
  and surplus                   $ 74,144,186      $ 68,518,020      $ 62,672,151
                                ================================================
Statutory unassigned
  surplus                       $ 43,183,322      $ 37,557,156      $ 31,711,287
                                ================================================
Statutory net income            $  6,974,230      $  3,855,803      $  6,480,524
- --------------------------------================================================
SOUTHERN

Statutory capital
  and surplus                   $  9,082,587      $  7,293,856      $  6,388,316
                                ================================================
Statutory unassigned
  surplus                       $  3,980,317      $  2,191,586      $  1,636,046
                                ================================================
Statutory net income            $  1,543,128      $    184,285      $     66,297
- --------------------------------================================================
DELAWARE

Statutory capital
  and surplus                   $ 10,051,711      $  9,563,808      $  8,548,354
                                ================================================
Statutory unassigned
  surplus                       $  4,851,711      $  4,363,808      $  3,348,354
                                ================================================
Statutory net income            $  1,223,992      $    898,360      $  1,085,807
- --------------------------------================================================
PIONEER-OHIO

Statutory capital
  and surplus                   $  5,811,315      $  5,677,926      $  5,300,349
                                ================================================
Statutory unassigned
  deficit                       $ (1,188,685)     $ (1,322,074)     $ (1,699,651)
                                ================================================
Statutory net income (loss)     $   (176,011)     $    108,322      $    188,579
- --------------------------------================================================
SOUTHERN HERITAGE

Statutory capital
  and surplus                   $ 16,975,171      $ 16,508,422      $ 15,805,641
                                ================================================
Statutory unassigned
  deficit                       $(15,540,144)     $(16,006,893)     $(16,709,674)
                                ================================================
Statutory net income (loss)     $  1,486,698      $    487,098      $ (3,937,548)
                                ================================================

                               p a g e  2 4

    The Company's principal source of cash for payment of dividends are
dividends from its Insurance Subsidiaries which are required by law to
maintain certain minimum capital and surplus on a statutory basis and are
subject to regulations under which payment of dividends from statutory
surplus is restricted and may require prior approval of their domiciliary
insurance regulatory authorities.  Atlantic States, Southern, Delaware,
Pioneer-Ohio and Southern Heritage are also subject to Risk Based Capital
(RBC) requirements which may further impact their ability to pay dividends.
At December 31, 2000, all five companies' statutory capital and surplus
were substantially above the RBC requirements.  At December 31, 2000,
amounts available for distribution as dividends to Donegal Group Inc.
without prior approval of insurance regulatory authorities are $5,414,419
from Atlantic States, $908,259 from Southern, $323,992 from Delaware,
$581,132 from Pioneer-Ohio and $973,796 from Southern Heritage.

    The National Association of Insurance Commissioners (NAIC) has adopted
the Codification of Statutory Accounting Principles with an effective date
of January 1, 2001.  The codified principles are intended to provide a
basis of accounting recognized and adhered to in the absence of conflict
with, or silence of, state statutes and regulations.  The impact of the
codified principles on the statutory capital and surplus of the Company's
Insurance Subsidiaries is not expected to decrease statutory capital and
surplus as of January 1, 2001.

13--RECONCILIATION OF STATUTORY FILINGS TO
    AMOUNTS REPORTED HEREIN

The Company's Insurance Subsidiaries are required to file statutory
financial statements with state insurance regulatory authorities.
Accounting principles used to prepare these statutory financial statements
differ from financial statements prepared on the basis of generally
accepted accounting principles.

    Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included
in the accompanying financial statements are as follows:

                                             Year Ended December 31,
                                ------------------------------------------------
                                    2000             1999              1998
- --------------------------------------------------------------------------------
                                                           
Statutory net income of
  Insurance Subsidiaries        $11,052,037       $5,533,868        $8,301,081
Increases (decreases):
  Deferred policy
    acquisition costs               816,955         (130,999)          399,428
  Deferred federal
    income taxes                   (491,799)       3,790,122          (158,593)
  Salvage and subrogation
    recoverable                     305,918         (226,617)        1,217,092
  Consolidating eliminations
    and adjustments              (4,318,624)      (1,387,864)         (967,940)
  Parent-only net income (loss)   1,522,870         (908,987)          178,249
  Non-insurance subsidiary
    net income (loss)                    --          (12,586)           48,523
- --------------------------------------------------------------------------------
Net income as
  reported herein               $ 8,887,357       $6,656,937        $9,017,840
================================================================================

                                                  December 31,
                                ------------------------------------------------
                                    2000             1999              1998
- --------------------------------------------------------------------------------
                                                           
Statutory capital and surplus
  of Insurance Subsidiaries     $116,064,970      $107,562,032      $ 98,714,811
Increases (decreases):
  Deferred policy
    acquisition costs             12,020,257        11,203,302        11,334,301
  Deferred federal
    income taxes                   7,627,883         9,121,232         3,592,605
  Salvage and subrogation
    recoverable                    8,042,860         7,736,942         7,963,559
  Statutory reserves               2,623,921         5,066,505         9,066,998
  Non-admitted assets and
    other adjustments, net           839,042           793,715         1,178,102
  Fixed maturities                   491,179        (2,889,365)        2,038,604
  Consolidating eliminations
    and adjustments              (36,531,786)      (36,630,839)      (36,383,362)
  Parent-only equity               2,566,929         1,451,088         2,843,990
  Non-insurance
    subsidiary equity                     --                --           281,396
- --------------------------------------------------------------------------------
Stockholders' equity as
  reported herein               $113,745,255      $103,414,612      $100,631,004
================================================================================

14--SUPPLEMENTARY INFORMATION ON STATEMENT OF CASH FLOWS

The following reflects income taxes and interest paid during 2000, 1999
and 1998:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Income taxes                    $  1,967,331      $  1,233,414      $  2,671,969
================================================================================
Interest                        $  2,731,048      $  1,370,155      $  1,270,646
================================================================================

During 1999, the Company wrote off fixed assets with a net carrying
value of $407,000 which was a non-cash charge to earnings.

15--EARNINGS PER SHARE

The following information illustrates the computation of net income,
outstanding shares and earnings per share on both a basic and diluted basis
for the years ending December 31, 2000, 1999 and 1998:

                                                  Weighted-
                                                   Average        Earnings
                                   Net             Shares            Per
                                  Income         Outstanding        Share
- --------------------------------------------------------------------------------
                                                           
2000:
Basic                           $ 8,887,357       8,715,899         $1.02
Effect of stock options                  --          21,011            --
- --------------------------------------------------------------------------------
Diluted                         $ 8,887,357       8,736,910         $1.02
================================================================================
1999:
Basic                           $ 6,656,937       8,327,356         $ .80
Effect of stock options                  --              --            --
- --------------------------------------------------------------------------------
Diluted                         $ 6,656,937       8,327,356         $ .80
================================================================================
1998:
Basic                           $ 9,017,840       8,126,286         $1.11
Effect of stock options                  --         123,404         (0.02)
- --------------------------------------------------------------------------------
Diluted                         $ 9,017,840       8,249,690         $1.09
================================================================================

                               p a g e  2 5

The following options to purchase shares of common stock were not
included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price:

                                    2000              1999               1998
- --------------------------------------------------------------------------------
                                                           
Options excluded from
  diluted earnings per share    1,045,338         1,496,393         585,337
================================================================================

16--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

                         CONDENSED BALANCE SHEETS

                             ($ in thousands)

December 31,                                            2000          1999
- --------------------------------------------------------------------------------
                                                              
ASSETS

Investment in subsidiaries (equity method)            $150,774      $138,702
Cash                                                     2,381           371
Property and equipment                                   1,997         2,232
Other                                                      715           750
- --------------------------------------------------------------------------------
    Total assets                                      $155,867      $142,055
================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
  Cash dividends declared to stockholders             $    797      $    761
  Line of credit                                        40,000        37,000
  Other                                                  1,325           879
- --------------------------------------------------------------------------------
    Total liabilities                                   42,122        38,640
- --------------------------------------------------------------------------------
Stockholders' equity                                   113,745       103,415
- --------------------------------------------------------------------------------
    Total liabilities and stockholders' equity        $155,867      $142,055
================================================================================

                      CONDENSED STATEMENTS OF INCOME

                             ($ in thousands)

Year Ended December 31,                    2000          1999          1998
- --------------------------------------------------------------------------------
                                                           
Revenues
Dividends-subsidiaries                  $ 3,900       $   820       $ 1,000
Other                                       866           865           776
- --------------------------------------------------------------------------------
    Total revenues                        4,766         1,685         1,776
- --------------------------------------------------------------------------------
Expenses
Operating expenses                        1,165           938           718
Interest                                  3,304         2,463         1,293
- --------------------------------------------------------------------------------
    Total expenses                        4,469         3,401         2,011
- --------------------------------------------------------------------------------
Income (loss) before income tax benefit
  and equity in undistributed net
  income of subsidiaries                    297        (1,716)         (235)
Income tax benefit                       (1,226)         (807)         (413)
- --------------------------------------------------------------------------------
Income (loss) before equity
  in undistributed net income
  of subsidiaries                         1,523          (909)          178
Equity in undistributed net income
  of subsidiaries                         7,364         7,566         8,840
- --------------------------------------------------------------------------------
Net income                              $ 8,887       $ 6,657       $ 9,018
================================================================================

                    CONDENSED STATEMENTS OF CASH FLOWS

                             ($ in thousands)

Year Ended December 31,                    2000          1999          1998
- --------------------------------------------------------------------------------
                                                           
Cash flows from operating activities:
  Net income                            $ 8,887       $ 6,657       $ 9,018
- --------------------------------------------------------------------------------
  Adjustments:
    Equity in undistributed net
      income of subsidiaries             (7,364)       (7,566)       (8,840)
    Other                                 1,123         2,365          (921)
- --------------------------------------------------------------------------------
      Net adjustments                    (6,241)       (5,201)       (9,761)
- --------------------------------------------------------------------------------
    Net cash provided (used)              2,646         1,456          (743)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
  Net purchase of property and
    equipment                              (262)         (426)         (564)
    Capital contribution to subsidiaries     --            --        (2,000)
  Sale of AIS                                --           100            --
  Acquisition of Donegal Financial
    Services Corp.                       (3,042)           --            --
  Acquisition of Southern Heritage           --            --       (18,028)
  Other                                      38          (426)       (5,613)
- --------------------------------------------------------------------------------
    Net cash used                        (3,266)         (752)      (26,205)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
  Cash dividends paid                    (3,127)       (2,946)       (2,664)
  Issuance of common stock                2,757         2,514         2,481
  Line of credit, net                     3,000          (500)       27,000
- --------------------------------------------------------------------------------
    Net cash provided (used)              2,630          (932)       26,817
- --------------------------------------------------------------------------------
Net change in cash                        2,010          (228)         (131)
  Cash at beginning of year                 371           599           730
- --------------------------------------------------------------------------------
  Cash at ending of year                $ 2,381       $   371       $   599
================================================================================

                               p a g e  2 6

17--SEGMENT INFORMATION

As an underwriter of property and casualty insurance, the Company has
three reportable segments which consist of the investment function, the
personal lines of insurance and the commercial lines of insurance.  Using
independent agents, the Company markets personal lines of insurance to
individuals and commercial lines of insurance to small and medium-sized
businesses.

    The Company evaluates the performance of the personal lines and
commercial lines primarily based upon underwriting results as determined
under statutory accounting practices (SAP) for the total business of the
Company.

    Assets are not allocated to the personal and commercial lines and are
reviewed in total by management for purposes of decision making.  Donegal
Group Inc. operates only in the United States and no single customer or
agent provides 10 percent or more of revenues.

    Financial data by segment is as follows:

                                           2000          1999          1998
                                        ----------------------------------------
                                                   ($ in thousands)
- --------------------------------------------------------------------------------
                                                           
Revenues:
  Premiums earned:
    Commercial lines                    $ 54,515      $ 47,707      $ 44,493
    Personal lines                        95,199        96,167        71,676
- --------------------------------------------------------------------------------
      Total premiums earned              149,714       143,874       116,169
- --------------------------------------------------------------------------------
    Net investment income                 15,992        13,224        11,998
    Realized investment
      gains (losses)                         171           (39)          (14)
    Other                                  2,346         2,652         2,433
- --------------------------------------------------------------------------------
Total revenues                          $168,223      $159,711      $130,586
================================================================================

Income before income taxes:
  Underwriting income (loss):
    Commercial lines                    $    736      $   (826)     $  3,688
    Personal lines                        (4,094)       (8,238)       (5,327)
- --------------------------------------------------------------------------------
      SAP underwriting loss               (3,358)       (9,064)       (1,639)
    GAAP adjustments                       1,122          (251)        1,803
- --------------------------------------------------------------------------------
      GAAP underwriting loss              (2,236)       (9,315)          164
  Net investment income                   15,992        13,224        11,998
  Realized investment gains (losses)         171           (39)          (14)
  Other                                   (2,104)         (241)         (471)
- --------------------------------------------------------------------------------
Income before income taxes              $ 11,823      $  3,629      $ 11,677
================================================================================

18--RESTRUCTURING CHARGE

On September 29, 1999, the Company announced a plan to consolidate
certain subsidiary support functions into its Marietta, Pennsylvania
office.  As a result of this consolidation, the Company recorded a
restructuring charge of $2,206,000 in 1999 for employee termination
benefits, occupancy charges, lease cancellation costs, and asset
impairments.  The charge was included in other underwriting expenses.  The
consolidation was completed by the end of the first quarter of 2000.

    Employee termination benefits of $782,000 included severance payments,
which were paid in a lump sum or over a defined period, and related
benefits for approximately 60 employees.  Of the terminated employees,
approximately 50% were from subsidiary support functions and approximately
50% were from the Marietta, Pennsylvania office.  By December 31, 1999, all
of the terminated employees had left the employment of the Company.

    Included in occupancy charges of $488,000 were future lease
obligations, less anticipated sublease benefits, for leased space which is
no longer used by the Delaware and Southern Heritage subsidiary support
functions.

    Also included in the restructuring charge was $529,000 related to
contract cancellation costs that represented the estimated cost to buy out
of the remaining term on printer, copier, and computer processing contracts
that provided no future benefit to the Company as a result of the
restructuring.  All such assets have been taken out of service.

    Asset impairments, which were a direct result of the consolidation of
subsidiary functions, amounted to $407,000.  They consisted of capitalized
programming and data center costs, voice systems, and leasehold and office
improvements.  These assets were written-down to zero.  All such assets
have been taken out of service.

    Activity in the restructuring accrual is as follows:

                        Employee
                      Termination                 Contract
                        Benefits    Occupancy   Cancellations     Total
- ---------------------------------------------------------------------------
                                                   
Restructuring
  charge                $782,000    $488,000      $529,000     $1,799,000
Cash payments           (343,000)    (47,000)     (365,000)      (755,000)
Reversal of
  prior accrual          (71,000)         --       (91,000)      (162,000)
- ---------------------------------------------------------------------------
Balance at
  December 31, 1999     $368,000    $441,000      $ 73,000     $  882,000
- ---------------------------------------------------------------------------
Cash payments           (339,000)   (155,000)      (73,000)      (567,000)
Accrual adjustment            --      12,000            --         12,000
- ---------------------------------------------------------------------------
Balance at
  December 31, 2000     $ 29,000    $298,000            --     $  327,000
===========================================================================

Based on revised estimates, $162,000 of the restructuring accrual was
reversed by a reduction to the restructuring charge in other underwriting
expenses in the fourth quarter of 1999.  Employee termination benefits and
contract cancellation costs were lower than original estimates.

19--GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS

The Company accrues for guaranty-fund and other insurance-related
assessments in accordance with Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance- Related
Assessments."  SOP 97-3 provides guidance for determining when an entity
should recognize a liability for guaranty-fund and other insurance-related
assessments, how to measure that liability, and when an asset may be
recognized for the recovery of such assessments through premium tax offsets
or policy surcharges.  The Company's liabilities for guaranty-fund and
other insurance-related assessments were $880,154 and $582,480 at December
31, 2000 and 1999, respectively.  These liabilities included $397,832 and
$47,962 related to surcharges collected by the Company on behalf of
regulatory authorities for 2000 and 1999, respectively.  The Company
expects to pay most of the December 31, 2000 liability in 2001.

                               p a g e  2 7

20--INTERIM FINANCIAL DATA (UNAUDITED)

                                                2000
                        -----------------------------------------------------
                           First        Second         Third        Fourth
                          Quarter       Quarter       Quarter       Quarter
- -----------------------------------------------------------------------------
                                                     
Net premiums
  earned               $35,585,093   $36,022,649   $38,650,546   $39,455,274
Total revenues          39,745,534    40,801,600    43,630,503    44,045,362
Net losses and loss
  expenses              25,537,992    24,605,750    26,486,679    26,511,484
Net income               1,250,234     2,470,400     2,602,045     2,564,678
Net income per
  common share
    Basic                     $.15          $.28          $.30          $.29
    Diluted                    .15           .28           .30           .29

                                                1999
                        -----------------------------------------------------
                           First        Second         Third        Fourth
                          Quarter       Quarter       Quarter       Quarter
- -----------------------------------------------------------------------------
                                                     
Net premiums
  earned               $36,093,971   $35,829,815   $35,955,556   $35,994,628
Total revenues          40,109,990    39,787,987    39,802,234    40,010,896
Net losses and loss
  expenses              24,451,651    24,162,300    26,449,962    24,141,089
Net income (loss)        2,151,367     1,300,736    (2,442,880)    5,647,714
Net income (loss) per
  common share
    Basic                     $.26          $.16         $(.29)         $.67
    Diluted                    .26           .16          (.29)          .67

- --------------------------------------------------------------------------------

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors
Donegal Group Inc.

We have audited the accompanying consolidated balance sheets of Donegal
Group Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donegal
Group Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.

KPMG LLP
Philadelphia, Pennsylvania
February 23, 2001

                               p a g e  2 8

CORPORATE INFORMATION

  ANNUAL MEETING
  April 19, 2001 at the Company's headquarters
  at 10:00 a.m.

  FORM 10-K

  A copy of Donegal Group's Annual Report on Form 10-K
  will be furnished free upon written request to Ralph
  G. Spontak, Senior Vice President and Chief Financial
  Officer, at the corporate address.

  MARKET INFORMATION

  Donegal Group's common stock is traded on NASDAQ
  under the symbol "DGIC."  During 1999 and 2000, the
  stock price ranged as follows:

                                CASH DIVIDEND
                                  DECLARED
  QUARTER      HIGH       LOW     PER SHARE

    1999

    1st       16.250    10.500       --
    2nd       13.000    10.063      .09
    3rd       11.625     6.125      .09
    4th       10.625     5.750      .18

    2000

    1st        8.625     5.750       --
    2nd        8.250     5.750      .09
    3rd        8.000     5.750      .09
    4th       13.938     7.125      .18

CORPORATE OFFICES

1195 River Road
P.O. Box 302
Marietta, Pennsylvania 17547-0302
(717) 426-1931
E-mail Address: info@donegalgroup.com
Donegal Website: www.donegalgroup.com

TRANSFER AGENT

First Chicago Trust Co., a Division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 317-4445
E-mail Address: fctc@em.fcnbd.com
FCTC Website: www.fctc.com
Hearing Impaired: TDD:  201-222-4955

DIVIDEND REINVESTMENT PLAN

The Company offers a dividend reinvestment plan through
its transfer agent.
For information contact:
Donegal Group Inc. Dividend Reinvestment Plan
c/o First Chicago Trust Co., a Division of EquiServe
P.O. Box 2598
Jersey City, NJ 07303-2598
(800) 317-4445

STOCKHOLDERS

The number of common stockholders of record as of
December 31, 2000 was 656.

                                                                      EXHIBIT 21

                           SUBSIDIARIES OF REGISTRANT

         Registrant owns 100% of the outstanding stock of the following
insurance companies:

Name                                                        State of Formation
- ----                                                        ------------------

Atlantic States Insurance                                        Pennsylvania

Southern Insurance Company of Virginia                           Virginia

Pioneer Insurance Company                                        Ohio

Delaware Atlantic Insurance Company                              Delaware

Southern Heritage Insurance Company                              Georgia

Pioneer Insurance Company                                        New York

                                                                      EXHIBIT 23

              Independent Auditors' Consent and Report on Schedules

The Board of Directors
Donegal Group Inc.:

The audits referred to in our report dated February 23, 2001 include the related
financial statement schedules as of December 31, 2000, and for each of the years
in the three-year period ended December 31, 2000, included in the annual report
on Form 10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

We consent to incorporation by reference in the registration statements (Nos.
333-1287, 333-06681, 33-26693, 33-61095, 333-93785 and 333-94301) on Forms S-8
and registration statement (No. 333-36585) on Form S-3 of Donegal Group Inc. of
our reports dated February 23, 2001, relating to the consolidated balance sheets
of Donegal Group Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows and related financial statement schedules for each of the years
in the three-year period ended December 31, 2000, which reports appear in the
December 31, 2000 annual report on Form 10-K of Donegal Group Inc.

KPMG LLP

Philadelphia, Pennsylvania
March 29, 2001